Government budget

Question 1

Reasons for a budget deficit

Answer 1

Recession causing rising unemployment
Inactivity leading to increased unemployment benefits
Decrease in consumer spending = less tax revenue

Question 2

Cyclical fiscal balance

Answer 2

A change in the direction of government expenditure due to state of the economy. eg. in a boom, tax receipts are high and low spending on unemployment benefits.

Question 3

Structural fiscal balance

Answer 3

Who produces and allocates what resources to whom and if the government are able to afford the resources. eg. long term effects of UK ageing population

Question 4

Difference between budget deficit and budget surplus.

Answer 4

Budget deficit is when government spending is higher than taxation in a year.
Budget surplus is when taxation is higher than government spending in a year.

Question 5

National debt

Answer 5

The accumulation of all deficits in the past years for a government.

Question 6

Relationship between budget surplus / deficit and national debt

Answer 6

Budget surplus can be used to pay off national debt.
Budget deficit will increase the national debt.

Question 7

Laffer curve

Answer 7

If tax rates are too high, it will discourage work and investment, reducing total revenues - firms may offshore. *check book for diagram

Question 8

Effects of a budget deficit

Answer 8

Rise in national debt
Rise in public sector debt
Rise in debt interest payments (as more loans taken out)
Increase in AD

Question 9

Effects of a budget surplus

Answer 9

Higher taxes lead to lower spending
Impact on economic growth
Laffer curve