National Debt Flashcards
Define National debt
The total amount of debt that the government owes the private sector.
Define a budget deficit
A budget deficit is the annual amount the government must borrow to meet government spending.
A budget deficit occurs when a governments tax revenue is insufficient to pay for a given level of state spending.
Define cyclical budget deficit
The cyclical budget deficit takes into account the fluctuations in tax revenue and spending due to the economic cycle.
For example, A country with a balanced budget runs a deficit for a couple of years after a financial downturn before returning to a balanced budget would have a cyclical deficit.
Define structural deficits
Structural deficits that are on-going and not caused by any short-term macro-economic fluctuation.
A country running continuous 5% deficits in normal times has a structural deficit.
What are the causes of national debt
Budget Deficits - government spending more money than it receives in revenue.
Economic Recessions: During recessions government revenues from taxes tend to decrease due to lower incomes, governments may increase spending to stimulate the economy
Public Services and Infrastructure: Governments borrow to fund public services like healthcare, education, and welfare, as well as infrastructure projects
Wars and Military Spending: Wars are expensive and often require significant government spending
What is the problem with having a high national debt
Interest payments
Higher taxes / lower spending in the future
Less spending on the private sector
Fall in confidence
Slower growth
Describe tightening fiscal policy to reduce a budget deficit
In conclusion, while tightening fiscal policy during a downturn can help reduce budget deficits and stabilize national debt, it also risks deepening the economic slowdown and increasing social inequality.
What are the advantages of tightening fiscal policy to reduce a budget deficit
Reducing National Debt: By tightening fiscal policy, governments can reduce budget deficits, thereby slowing the accumulation of national debt.
Controlling Inflation: If the economy is at risk of overheating or if inflationary pressures are evident, tightening fiscal policy can help stabilise prices
What are the disadvantages of tightening fiscal policy to reduce a budget deficit
Disinflationary pressures - If fiscal tightening measures are too aggressive or implemented during a period of weak economic growth, they can lead to deflationary pressures.
Reduced Aggregate Demand: Fiscal tightening typically involves reducing government spending or increasing taxes therefore reducing consumption.
Crowding out - Fiscal tightening measures, such as higher taxes or reduced government spending, can crowd out private investment.
Why is debt is positive
If debt is used for productive investments that yield a higher return than the interest rate on the debt, it can be economically beneficial.
Why is debt negative
High Interest Payments: Large amounts of national debt can lead to significant portions of the government’s budget being allocated to interest payments, diverting funds away from other important areas like education or healthcare.
