fiscal policy : Budget balances and national debt

Question 1

how is the government budget presented ?

Answer 1

balanced budget
budget deficit
budget surplus

Question 2

what is a balance budget

Answer 2

A balanced budget means that government revenue = government expenditure

Question 3

what is a budget deficit ?

Answer 3

A budget deficit means that government revenue < government expenditure

Question 4

what is a budget surplus ?

Answer 4

A budget surplus means that government revenue > government expenditure

Question 5

what does the budget deficit have to be financed through?

Answer 5

A budget deficit has to be financed through public sector borrowing
This borrowing gets added to the national debt (the cumulative total of past government borrowing which has to be repaid with interest)

Question 6

what do Keynesian economists believe ?(Budget deficit)

Answer 6

Keynesian economists believe that the government should ‘run a budget deficit’ to finance spending and stimulate economic growth
However, this increasing debt puts a greater burden on the population that will have to repay it in the future

Question 7

what is a cyclical budget deficit / surplus related to ?

Answer 7

A cyclical budget deficit or surplus is related to the economic cycle and aggregate demand
During a boom, there is an improvement in the government budget as tax revenues rise and expenditure falls, decreasing the deficit
During a recession, there is an increase in government expenditure, leading to a greater budget deficit
A cyclical deficit could then be corrected when the economy recovers again through the impact of automatic stabilisers

Question 8

what does a structural budget focus on ?

Answer 8

A structural budget focuses on the long-term underlying fiscal position of the government, independent of the effects of the business cycle
It aims to assess whether government revenues are sufficient to cover ongoing expenditures over the long term, without considering temporary fluctuations in economic activity
Structural budget analysis often involves evaluating the sustainability of government policies and the need for fiscal adjustments to ensure long-term fiscal stability

Question 9

what is the impact of borrowing outside the country ?

Answer 9

Borrowing from outside the country (external borrowing) may cause political vulnerabilities
Singapore only borrows from its own citizens (internal borrowing), which reduces the risk of external pressure on their policies

Question 10

what are the consequences of a budget deficit?

Answer 10

an impact on economic growth
inflationary pressures
an increase in national debt
vulnerabilities to economic shocks

Question 11

national debt consequence explained

Answer 11

National debt rises as the government spends more than it takes in. This money has to be paid back with interest
There is a burden on future generations, as they are left with large interest payments on the debt
This creates an opportunity cost as future governments may have to cut spending on services, in order to repay the debt

Question 12

inflationary pressures consequence explained

Answer 12

A deficit can cause the economy to overheat, as governments spend more money (injects more than it withdraws)
This causes demand pull inflation, as there is more money in circulation

Question 13

economic shocks consequence explained

Answer 13

The economy is more vulnerable to economic shocks
If there is no surplus set aside in the event of a shock (e.g. Covid), then the ability to respond is limited

Question 14

economic growth consequence explained

Answer 14

If the borrowing is to be spent as increased government spending, the economy may benefit in the short to medium term
However, more borrowing may cause inflation, which can lead to a rise in interest rates to curb that inflationary pressure
Higher interest rates will discourage investment by firms and also cause the nation’s currency to appreciate, meaning that its exports are less price competitive
In the longer term, fewer investments and exports, together with higher interest payments on the debt, may cause AD to fall and lead to lower levels of economic growth

Question 15

what can a budget surplus be used for and the impact ?

Answer 15

A budget surplus can be used to reduce general government debt and reduce future costs of servicing the debt
However, a surplus may mean that the government withdraws (higher taxes) more money than it injects (less spending)
A surplus may then reduce economic growth and also reduce pressure on prices levels leading to disinflation or even deflation

Question 16

what is the implication of large national debt ?

Answer 16

cost

opportunity cost

diminishing international credit - rating

crossing put

Question 17

The Significance of Large National Debt -cost

Answer 17

A growing national debt results in higher annual cost of repaying national debt plus paying interest
The increase will prompt the government to raise taxes for future taxpayers Increasing the burden on future generations

Question 18

The Significance of Large National Debt - opportunity costs

Answer 18

With more government income being used to meet our annual interest repayments, the government has less funds available
The Government will have to cut back spending on certain public services

Question 19

The Significance of Large National Debt - Diminished international credit-rating

Answer 19

An increasing national debt means that UK’s credit-rating is deteriorating
This may cause firms and foreign countries to stop lending money to UK
This will constrain the country’s ability to grow in future.

Question 20

The Significance of Large National Debt - crowding out

Answer 20

When governments borrow money, they do so by selling bonds (treasury bills) to people who want to save

This increases demand for savings and in turn increases interest rates

A higher interest rate reduce incentive to borrow by firms/consumers
Resulting in reduced aggregate demand

Question 21

what is the role of the office for budget responsibilities

Answer 21

The primary responsibility of OBR is to manage public sector finances
Other responsibilities include:
Providing detailed forecasts on the current economic performance
An analysis of UK public spending and taxation
Assesses the performance of the government against the fiscal targets set
Advises government on economic predictions to aid with future policymaking
Uses long-term projections to analyse sustainability of government spending and revenue