Discuss the extent to which you agree with the following Statement: The Government must make significant cuts to generate future economic growth.

Government Spending is one of the components of Aggregate Demand, alongside consumer expenditure, investment and net exports. With any changes to any of these components, AD will either shift backwards or forwards, as if government spending increased it would cause AD to shift forward and with the multiplier effect it would increase AD more, increasing output and increasing the Real GDP, and so showing the economy growing.
However, a large increase in government spending causing a large multiplier may be bad for the economy, even though they would be operating at optimum output, it could mean that AD has increased too much and there is not enough or no potential growth, causing increases in inflation and making it harder for consumers to buy the same amount of goods without having wage increases, which means that governments would have to increase their spending again.
Government Spending comes from two main sources, tax revenue and lending, as the revenue earned from tax, the government use to fund the NHS, education services etc, which are good sources to put revenue into to cause actual and potential economic growth, tax revenue sometimes may not be enough amount of money; this is when the government would start lending money from central banks etc and this would be a budget deficit as government spending is greater than tax revenue.
A budget deficit can go into millions and billions of pounds and the current Uk deficit is £1 trillion pounds and increasing, this may show signs of less tax being received and could mean that there is not enough actual economic growth as there could be a higher rate of unemployment or businesses becoming bankrupt, and an increase in government spending could be signs of an economy trying to come out of a recession by stimulating actual economic growth.
So sometimes a budget deficit would be a good sign, as it may be increasing quality of education and health care services; which also causes potential economic growth, and producing more jobs for the labour force making the country more competitive with more efficient workers and potentially lowers inflation as well.

The graph shows the effect of government spending and the multiplier effect increasing AD, but also increasing the LRAS curve as well increasing the capacity of the economy which is good for the economy as its GDP is increasing and there is potential economic growth as well.

However, in a budget deficit, the government has to gain the revenue for its spending sprees, and that is done by the lending from central banks , this borrowed amount has to be paid back by the government with interest as well; this again increases the budget deficit.
The way the government could pay the debt back is by increasing VAT or other taxes to gain revenue, but they may still require extra money for their required areas e.g. healthcare etc, this means they may need to increases taxes to cover the lending debt and also fund for spending.
Another way the present government is trying to reduce the budget deficit is with austerity measures where they are cutting government spending in benefits, healthcare education etc.
cutting government spending can cause a negative movement of AD and also a negative multiplier effect retreating the AD curve even more, this could decrease Real GDP, unless there is a matched or greater increase in other components of AD, this shows that it could even cause a recession if it is continues for more than 2 quarters.
Another effect that an increasing budget deficit could be that it could affect the countries credit rating which for the UK is currently AAA, this means that it is safe for investors to invest in the country and can get their money back and more, which is a good thing as it means that the country has good resources of gaining the extra revenue and also the better the credit rating the lower the interest rate.
The credit rating can be lowered depending on how much and how long a budget deficit is increasing as it means that the economy is continuously falling short of revenue and is borrowing to pay debts back, which means that investors may not get their money back and so means that there could be less investors and higher interest rates.
For a country like Greece their credit rating has decreased all the way to ‘junk’ meaning that it is unsafe for investors to buy the debt, due to how large their budget deficit is.
Again this would cause rippling effects onto the economy as consumers would be effected as other solutions to gain revenue would be increasing even more and due to interest rates increasing (using a monetary policy to get investors to invest) it could meant that consumers would have less discretionary income, which causes further falls in GDP.

Since the 2008 recession the government has increased government spending to get out of the recession (automatic stabilisers e.g. less tax more benefits), in 5 years it has actually caused a decline of GDP, due lack of consumer and investment confidence in the economy, and the budget deficit doubling in size, a logical thing may be that cutting government spending and using austerity measures may be used to look to cut the deficit and the economy working in a cycle again.
On the other hand a country such as the USA, has dine the opposite and increased government spending to increase the output of the economy, which has shown unemployment decreasing and the economy growing, but also facing a decline in credit ratings, but really not having much effect of getting extra revenue, and even some countries such as Japan, which have a budget deficit of a 223% the size of their real GDP, does not face any decrease in any credit rating.

I believe that, whether the credit ratings change, the economy grows or not, depends on other issues as well such as the position of AD, natural disasters which cannot be taken account as bad decisions, but for a country such as the UK, austerity measures and a decline in government spending may be the best way to generate future economic growth, so more boom periods occur and due to some government spending may not be good anyway to increase potential growth as time lags may occur and what it was ‘invested’ into may not be required-low demand.