FirstNews ISSUE 275

FirstNews ISSUE 275 9 – 15 SEPTEMBER 2011BIG ISSUEFor more special reports, pictures and videos go to www.firstnews.co.uk/discover25The EconomyExplainedTHERE has been lots of serious news this summer, from the riots to events inLibya, but you may also have seen news about worries over the economy.Here, the Institute for Fiscal Studies explains what’s been going on…THE ECONOMY ANDRECESSIONMost of the time countries get better offyear after year. New machines and newinventions mean we can produce more,more quickly than we used to be able to.But sometimes economies experiencerecessions. Recessions are periods when theamount of output produced by a countryThe result will be more cuts inGovernment spending than everbefore. Most of the things theGovernment spends its moneyon – like hospitals, schools,roads, libraries and the police –will be affected. And one reasonyour teachers might have goneon strike last term was that, likealmost everyone else, they willhave to share in these cuts.THE DEBT CRISISfalls instead of grows: people lose their jobsor earn less, and companies stop investingin new machinery and people buy less.Families become worse off. In 2008 and2009 the amount of output produced by theUK fell by nearly 7%, which is the biggest fallsince World War 2. That’s why many peoplecall it the “Great Recession”. Although theeconomy has now started to grow again,we are still producing (and so consuming)less than we did in 2008.THE SPENDING CUTSThe Government provides public services,like schools and hospitals, and it also helpspoor families by giving them extra income.They pay for these things by taking tax onthe money people earn and the things theybuy. So, people who have higher incomes,and who spend more, pay more in taxes.But during the recent recession people’sincomes fell and they spent less. So theamount of tax they paid also fell. The BritishGovernment now finds itself spendingfar more than it is raising in taxes. In fact,last year the Government spent about £5for every £4 it received from taxes. As aresult it had to borrow money. In 2009 theGovernment borrowed more than it had inany other year since the end of World War 2.Everyone agreed that something had tobe done; the current coalition governmenthas decided to increase taxes and cutspending a lot in order to reduce borrowing.Although Britain was in aworse position than nearly anyother country in terms of theamount it has had to borrow, itdoes, at least, look like we willbe able to pay the money back.But people are getting more and moreworried that some other countries won’t bewould want to be paid more for the riskthey are taking. This has already happenedto Greece, Ireland and Portugal. Andpeople are worried about France, Spainand Italy too.HOUSEHOLD INCOMESIn the end what matters to most of us ishow well off we are. The bad news is thatmost of us have got worse off over the lastyear and will get worse off again over thenext year. “I hope my four children readthis – and understand that this means theymight get cheaper Christmas presents thisyear, “ says Paul Johnson, Director of theInstitute for Fiscal StudiesSo look out for news on the economy: itprobably affects you more than anythingelse in the news.Find out more at: www.ifs.org.uk/Chart shows periods of recesssion,when the output of the economy (GrossDomestic Product) falls:Source: Office for National Statistics.able to pay back what they have borrowed.It seems amazing but sometimes wholecountries do just stop paying money backto people they have borrowed it from.If your parents did this they would findthemselves in big trouble. But it is hard topunish a whole country. What happensinstead is that people either refuse to lendthem more money or, if they do, they askfor much higher interest rates – that is, they