Reducing fiscal deficit Flashcards
Reducing fiscal deficit and national debt
UK has been using austerity since 2010, decreasing spending.
Tax Increases
Opposition parties (labour) offer demand stimulus by higher spending, causing economic growth in the future thus greater tax revenue, allowing for budget surpluses and eventually a reduction in debt
Can simply rely on automatic stabilisers to allow growth so national debt/fiscal deficit will decrease as a percentage of GDP. This was done by the US after the financial crisis, allowing for quick recovery
Default on loans - huge economic costs so only done if only option. Done by Argentina and Russia in the past
Cons of Macro Policies
Consider the impact of a policy on the other major Macro Policies (Low Inflation, Low unemployment, Inequality, Economic Growth)
Austerity to reduce national debt
UK Gov. after 2008. Led to increased inequality.
Impact of Austerity on unemployment - Can cause increased unemployment e.g. Greece in 2010 20% unemployment after bail out
Impact of Austerity on Inequality - Can worsen inequality. Those on transfer payments (e.g. benefits) - DRAW LORENZ CURVE, worsening of gini coefficient towards 1
Impact of Austerity on Inflation - Decreased inflation due to decreased consumption thus AD. This can be good if inflation is above target (2%), but if not it strays further from target level
Austerity could dampen potential Long Run growth as it can affect future LRAS through less pending on education etc.
Increased tax to reduce National debt
Impact on Inequality - Increased inequality if income tax is raised. Increased expenditure
Impact on Growth - Can reduce growth
Impact on inflation - Cost-push inflation
Increased Corp Tax - May deincentivise FDI
