Increasing Economic Growth Benefits and Costs


In the UK the average growth rate has been about 2.5% since 1945. Governments often try to increase the growth rate because it will have various advantages.

Benefits of Economic Growth

1. Firstly higher GDP implies the economy is producing more goods and services and therefore consumers can consume more, If human welfare is linked to consumption then growth will benefit society.

2 With higher GDP the govt will collect more taxes, this is because people will pay more income tax and VAT. This is beneficial because the govt can use this increased revenues to reduce the level of government borrowing and/or spend more on public services and investment in the country infrastructure.

3. Higher economic growth will lead to an increase in demand for labour as firms will be producing more. Therefore unemployment will fall, this has various advantages such as lower govt spending on benefits and less social problems.

However economic growth has various costs.

1. If economic growth is unsustainable and is higher than the long run trend rate inflation is likely to occur.

2. Furthermore this temporary boom in output is unlikely to continue and may be followed by an economic downturn or recession. Thus it can be very damaging to increase the rate of economic growth above the sustainable rate. This boom and bust cycle happened in the UK in the late 1980s and early 1990s.

3. Also an increase in economic growth could lead to a balance of payments problem. If the growth is caused by increased consumer spending like in the UK then there will be an increase in imports. If this rises faster than exports there will be a deficit. However growth could be export led e.g. Japan’s growth in the 1960s and 70s

4. Environmental Costs. Higher economic growth is contributing to global warming. The Stern report makes clear there is a very significant economic cost associated with Global Warming.

However if growth is increased through increasing the productive capacity and increasing the long run trend rate then inflation will not occur and the growth will be sustainable. Also it is possible to increase economic growth without causing severe environmental damage.