Although the third quarter of 2020 saw a positive growth in the UK’s real gross domestic product and a conclusion to the affliction that was the coronavirus recession, some weary citizens, still reflecting on the third lockdown’s weakening effect on economic growth, fear the possibility of a double-dip recession.

For a period of time to qualify as a recession, it must consist of two successive quarters of falling real gross domestic product. To counter this occurrence, the government must begin to implement response policies, either demand-side or supply-side, to improve economic growth. However, with COVID-19 breathing down the neck of each person who dares to step outside their home, it brings about the question of which policy would be the most effective in ensuring no future recession arises. 

With the use of demand-side policies utilized to influence aggregate demand, the government could implement an expansionary fiscal policy in which they increase government expenditure and decrease personal income and business taxes in order to stimulate consumption by households and investment by firms, prompting aggregate demand to increase closing the recessionary gap (and possibly leading to an inflationary gap if the extent of the growth is too large). Unfortunately, despite the fiscal policy’s ability to pull the UK’s economy out of a future deep recession, there are a plethora of hindrances that diminish the effectiveness of this policy for the government. For starters, the major time lags involving delays in making the decision to implement, the actual implementation and for the effects to be felt engender efficiency in the long run, but no effect in the short run. Accompanying the time lags, the increasing government expenditure could result in the UK’s budget deficit worsening further than the current £14 billion in the 2019/20 cycle, equivalent to 0.6% of GDP, causing national debt to presumably rise and pressure on the government to increase tax rates in order to reduce it. 

In the case of supply-side policies utilized to achieve long-term economic growth (increase the productive potential of the economy), the government could implement either interventionist or market-based policies. On the interventionist side, through direct government intervention, if the UK government were to invest more in human capital through investment in training programs, education or healthcare (NHS), the workforce would become better-trained and healthier leading to further productivity and an increased potential output. It also triggers a reduction in structural unemployment due to the more valued skillset labour force members would acquire from the training programs and further education schemes, which would make them more esteemed to the workforce. However, with this type of policy, along with the worsened budget deficit and time lags, the effectiveness could be brought into question as it creates an opportunity cost for the UK government in that the money spent on this policy cannot be spent in other areas of importance such as housing and community amenities, environment protection and culture and religion, all currently having £12 billion spent by the government on them. Is it worth it for the UK government to spend money on education and healthcare rather than other areas which need the additional funds just as much?

On the market-based side, based on institutional changes in the economy, one method to increase potential output of the economy the government could use is privatisation. By transferring ownership of firms from the government to private owners, such as in the case of British Aerospace, British Gas and British Airways, results in those firms becoming more profit maximisation-focussed. Following would be a decrease in bureaucracy due to the lack of government involvement and unproductive workers being laid off as their inefficiency goes against the business objective of profit maximisation. When they are laid off, efficiency in the firm enhances and potential output increases. Unfortunately, with this example of a market-based supply-side policy, privatisation leaves consumers disadvantaged as private firms are more likely than public firms to sell goods at higher prices and produce lower quantities in accordance with profit maximisation. This, along with the increased rate of unemployment, is damaging to the quality of life for those living in low-income households. 

If the government desired to prevent a double-dip recession in the near future. The most effective government policy would be that of an interventionist supply-side policy. Although both expansionary fiscal policy and market-based supply-side policies are able to pull an economy out of a recession through increasing economic growth, the extent of the time lags for fiscal policy and the negative effect onto consumers from privatisation are too large to be ignored. On the other hand, investing in education and healthcare, although could worsen the UK’s budget deficit, it reduces the natural rate of unemployment and in doing so increases the productive capacity of the economy, negating the existence of any possible recession in the looming future.