Fiscal policy Explain the possible causes of a falling budget deficit (15)

Question 1

Intro

Answer 1

A budget deficit means government spending exceeds government revenue, and a falling budget deficit means they are either spending less or gaining more revenue than before

Question 2

P1 - Increase in tax

Answer 2

• An increase in income tax means a fall in disposable incomes, leading to a fall in consumer spending (C is 2/3rds of AD), which results in a decrease in AD.
• Negative effects on the wider economy as increasing income tax is often regressive as leads to lower living standards and consumer confidence.
• The tax might be implemented to either directly decrease the budget deficit, or to reduce inflationary pressures.

Question 3

P2 - Decrease in government spending

Answer 3

• A decrease in government spending leads to a fall in AD due to lower government expenditure. Government spending might arise from different areas, such as investment in infrastructure or government spending on the NHS.
• Decrease in government spending on infrastructure projects or educational purposes could have further negative long-term effects on the productive potential of the economy.

Question 4

P3 - Experiencing an economic boom

Answer 4

• During an economic boom, there is no need for government spending to stimulate growth in an economy.
• A forward-thinking government might cut spending in preparation for the next recession in the economic cycle, which should lead to a fall in the budget deficit. D
• uring an economic recession, the government often increases levels of spending to prop up the economy by subsidising certain sectors to keep people in employment or to stimulate growth.