Here is a 25 marker model answer on government spending. It is suitable for students studying AQA Economics A Level.
You can watch me talk through the answer in the video below. Alternatively, you can read the model answer in full underneath.
Mini-extract and 25 mark question
Short extract: The UK Government plans for day-to-day spending to increase from£517.5 billion in the 2025/26 financial year to £583 billion in 2028/29. This represents an average increase of 1.2% a year in real terms. This includes increases to the government’s spending on healthcare and education. There is also a planned increase to government spending on capital projects of 1.8% a year in real terms over the same period. [Source: House of Commons Library]
Question: Evaluate the view that increasing government spending is likely to improve macroeconomic performance. (25)
Essay plan
Intro: Define macroeconomic performance.
Analysis point 1 (A1): Increases AD and causes a multiplier. Leads to economic growth.
Evaluation point 1 (E1): Depends on the position of the economy on Keynesian AS.
A2: Higher budget deficit and higher government borrowing. Consequences for debt interest and taxation.
E2: Some types of government spending may increase tax revenue – healthcare.
Conclusion: Government spending is likely to boost macroeconomic performance, provided the funding is used to boost the supply side of the economy. Depends on the level of interest rates and how extra spending is funded.
Colour codes for the model answer: Analysis point | Evaluation point | Use of context.
Full model answer
Macroeconomic performance can be measured using the macroeconomic objectives, such as sustained economic growth, full employment, a low, stable rate of inflation and current account balance.
An increase in government spending could improve macroeconomic performance by generating economic growth. The UK Government plans to increase government spending on investment projects in real terms by an average of 1.8% a year from 2025/26 to 2029/30. Government spending is a component of aggregate demand (AD = C + I + G + X – M). So, increasing government spending on hospitals increases AD, shifting the AD curve right from AD to AD1. This could then cause a multiplier effect, where an initial increase in government spending leads to an even larger increase in AD and real GDP. The extra spending on new hospitals leads to construction companies paid to build them increasing their revenue and profit. This gives the construction firm more money to pay its workers, so wages rise, leading to higher consumption and a further rise in AD. As a result AD shifts further right from AD1 to AD2. Altogether, there is an increase in the price level from PL1 to PL3 and an increase in real GDP from Y1 to Y3, resulting in economic growth in the UK.
However, this depends on the position of the UK economy on the Keynesian AS. During the early 2020s, the UK unemployment rate fell to 3.6%, which could suggest the UK economy had little spare capacity at the time. This would put the UK economy on the vertical part of the Keynesian AS at point A. In this case, a shift right in AD from AD3 to AD4 would simply lead to higher inflation without increasing the economic growth rate. Higher AD would just bid up wages without increasing production levels, as firms poach workers from other firms. As a result, increasing government spending may not lead to higher economic
growth.
Increasing government spending may worsen macroeconomic performance by leading to higher government borrowing. Increasing government spending may increase the budget deficit for the UK government, which stood at 4.3% of GDP in 2025. As a result, government debt, which was 94.3% of GDP in 2025, may increase, leading to higher debt interest payments by the UK Government. The government, having to pay out more in debt interest, incurs an opportunity cost. The government may have to forgo spending on other goods such as education. This could reduce the level of human capital in the economy, shifting the UK’s productive potential or LRAS inwards, slowing the trend rate of economic growth. Moreover, the government may decide to raise tax rates such as national insurance to pay for the extra government spending and prevent a rise in the budget deficit and national debt. The rise in employer’s national insurance contribution rates to 15% in April 2025, effectively a tax on hiring workers, may reduce the incentive to hire workers. This could reduce demand for labour and increase the unemployment rate.
However, this depends on where the government spending is allocated. For example, government spending on healthcare could make workers healthier. So workers have fewer sick days and are more productive at work. So productivity rises, shifting LRAS right. This could increase the trend growth rate of the UK economy above 1.25% a year, leading to higher profits for companies and incomes for workers, increasing corporation and income tax revenue and helping to reduce the budget deficit. So more government borrowing may not be required.
Overall, an increase in government spending, if spent on areas with supply-side benefits, is likely to improve macroeconomic performance for the UK economy. Increasing government spending on healthcare is likely to shift both AD and LRAS right, leading to sustained economic growth without an increase in inflation in the long run, avoiding a tradeoff. The success of an increase in government spending depends on the level of interest rates. With interest rates at a higher level of 3.75% as of May 2026 compared to 0.1% in 2020, the cost of further government borrowing has increased. So the increase in government spending must have a higher rate of return to outweigh the added borrowing cost. Interventionist supply-side spending by the government could provide this return through higher trend growth, boosting tax revenue over time. Taxing assets with price-inelastic supply, such as housing or land, may be more effective than national insurance rises for funding extra government spending. This may reduce the extent to which incentives to hire and work are harmed, while ensuring enough tax revenue is available to fund the extra government spending.
Tutor commentary on the answer
What should you learn from this essay?
- Analysis – detailed chains of reasoning, no gaps, that links to the question.
- Evaluation – show how the points may undermine the previous analysis.
- Context – examples throughout!
- Conclusion that answers the question and justifies the answer.
This answer would likely score full marks or close to it.
Other essay structures and points are possible. Other points could include:
- Crowding out and/or crowding in.
- More on the effect of higher taxes to pay for the extra government spending.
- Whether the government spending is funded by a sovereign wealth fund instead of borrowing.
- The effects of other areas of government spending such as welfare payments or infrastructure.
- Many other possible points!
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