Effects Of A Budget Surplus

Question 1

Effects of a budget surplus

Answer 1

Higher taxes/lower spending
Impact on growth
Impact on cost of borrowing
Impact on ability to survive future problems
Impact on investment
Sustainability

Question 2

Impact on growth

Answer 2

If govs forced to increase taxes/cut spending to meet a budget surplus, it can decrease growth

Question 3

Impact on cost of borrowing

Answer 3

Surplus will reduce national debt and push down bond yields and the amount of debt interest payments further generations need to pay. Cheaper for government to borrow

Question 4

Impact on ability to survive future problems

Answer 4

Surpluses give more scope for meeting a future crisis. If met with 100%debt of GDP it’s difficult to pursuer expansionary fiscal policy

Question 5

Impact on investment

Answer 5

If gov committed to running a surplus, they will likely cut back on public sector investment = market failure + harm long term productive capacity of the economy

Question 6

Is national debt sustainable

Answer 6

Argued to be not sustainable. But demographic trends will place increased pressure on government social security and NHS- these transfer payments are seen as unsustainable as it is not borrowing for investment

Question 7

You don’t need a budget surplus to…

Answer 7

…reduce debt to GDP ratio