Deficits & Debt

Question 1

Distinguish between Government deficit and debt.

Answer 1

Government Deficit is a flow variable, while debt is a stock variable.

Question 2

Respond to the statement, “government debt represents a burden on future generations of citizens”

Answer 2

2/3 of government debt is owed to UK citizens for whom it is a an asset
Government debt doesn’t have to be payed off, but rolled over
If debt is incurred as part of effective growth strategy, might men less burden
Government debt plays an increasingly central roles as a ‘safe asset’ that backstops the financial system

Question 3

Is government debt worth it ?

Answer 3

If investment leads to Economic growth, government has ability to collect tax revenue.
May address inequality, social and environmental challenges.

Question 4

how can debt be reduced ?

Answer 4

economic growth
inflation
GDP increases more than debt level

Question 5

Problems of Excessive Debt?

Answer 5

Fear
Countries may be cut from financial markets.
May force country to default.

Question 6

what is Maastricht Treaty

Answer 6

1992

Five Convergence Criteria

Question 7

what is Stability and Growth Pact?

Answer 7

1997

rules for euro-area countries about government deficit and government debt

Question 8

Discuss Private Debt

Answer 8

• Both the sub-prime and the eurozone crises were initially crises of private debt, not public debt
• Government bailouts of bank and non-bank financial institutions saw the debt transferred to the public balance sheet
• Austerity programmes, rather than eliminating debt through growth and repayment, were effectively an attempt to shift the debt back to the private sector
There has also been a geographical shift in debt, as the private sector in emerging capitalist economies loaded up on low-interest credit

Question 9

why might it be acceptable for governments to take on increasing levels of debt?

Answer 9

1. Developing countries may wish to borrow
2. Keynes: all governments should be prepared to run deficits during periods of supressed animal spirits.
3. By accounting definition, if governments run surpluses, the private sector must run deficits; this poses a different set of problems.

Question 10

How can a country steadily import more than it exports?

Answer 10

• by borrowing

- or by selling assets

Question 11

What is a balance-of-payments crisis?

Answer 11

A balance of payment crisis occurs when a country gets close to running out of foreign exchange and is therefore unable to purchase imports or service its existing debt