Reducing fiscal deficit

Question 1

Reducing fiscal deficit and national debt

Answer 1

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

Question 2

Cons of Macro Policies

Answer 2

Consider the impact of a policy on the other major Macro Policies (Low Inflation, Low unemployment, Inequality, Economic Growth)

Question 3

Austerity to reduce national debt

Answer 3

UK Gov. after 2008. Led to increased inequality.

Impact of Austerity on unemployment - Can cause increased unemployment, e.g. Greece bailed out in 2010 by IMF in exchange for austerity measures, unemployment of over 20%

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.

Question 4

Increased tax to reduce National debt

Answer 4

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