Macro - Budget Defecit

Question 1

What is a budget deficit?

Answer 1

A budget defecit is when a governments
TOTAL EXPENDITURE > TOTAL REVENUE in a given period

Question 2

What causes a budget deficit?

Answer 2

Government spending more than receiving in taxes and other income sources

Question 3

Why is a budget deficit a bad thing?

Answer 3

Adds to National Debt

Potential credit rating downgrade for country - if debt seen as unmanageable

If credit rating downgrade then cost of borrowing goes up

Future generations have to pay for it

Possible tax increases for future generations

Possible reduction in spending on merit/public goods

High government spending could fuel inflation, particularly if funded by printing money, rather than borrowing

High government spending could cause crowding out - public money spent when private money could have provided a solution

Question 4

Are there benefits to government spending that lead to a budget deficit?

Answer 4

Stimulate growth - funding infrastructure, public services or social projects

Investment in the future - education, healthcare or infrastructure - increase LR productivity and economic growth

Manage economic cycles- boost when demand is low

Question 5

What are the benefits of a budget surplus?

Answer 5

Ability to pay down debts

Gives investors confidence that finances are being well run - may lead to more investment

Allow country to manage ecomomic shocks

Question 6

What are the potential downsides of a surplus?

Answer 6

Depends how achieved
If through spending cuts or high tax rises = low economic growth

Underinvestment in public services (education, healthcare, infrastructure)?

Opportunity costs - if other high return projects not invested in

Question 7

Can budget deficits be cyclical?

Answer 7

Yes, linked to the economic cycle, rather than policies

E.g. taxes down as businesses make less profits: government spending up on welfare payments

Question 8

What is the difference between a structural budget deficit and a cyclical deficit?

Answer 8

A structural deficit exists regardless of where you are in the economic cycle

Caused by

perisistent over spending

Poor tax system (not efficient at collecting)

Debt interest payments (historic debts mean high interest payments)

Ageing population - not enough workers to fund retirees

Long term economic decline - low productivity or deindustrialisation =low tax

Question 9

Why might a budget deficit fall?

Answer 9

Economic growth generating more tax revenues

Economic growth meaning less need for government spending

Tax rises generating more tax revenues

Tax cuts causing fall in tax avoidance/evasion

Reduced spending

Privatisation of public assets