Budget Deficit Flashcards
(12 cards)
What does the budget deficit depend on ?
Size / proportion of GDP
Duration
Cause
Exisisting national debt
What the money is spent on
Governments ability to borrow
Size
Uk 2024 structural deficit was 2.2 %of GDP
Cause (cyclical/structural)
Cyclical : revenues increased during boom periods , spending decreased to pay of perivous deficits
Exisiting national debt
Size of debt vs size of GDP only 20% of tax is revenue
What the money is spent on
Will it create future revenues and productive capacity
Impact of Intergenerational inequality
Infrastructure increase costs now but benefit in future
Governments ability to borrow
Bonds become less attractive during periods of increase in inflation
So bonds worth less in real terms
3 ways to correct a budget deficit
Increase tax
Reduce govement spending
Economic growth
Increase taxation
Increasing direct taxes may reduce consumption , investment and AD
Country less attractive to MNC and migrant workers
May increase tax evasion/avoidance
Reduced government spending
Reduced AD
More difficult to achieve economic growth in the short run and the long run
May reduce quality and quantity of merit / public goods available and harm economic development
May reduce crowding out ( but also reduce business confidence )
Economic growth
As economy grows tax revenue rises more people in work pay more taxes , paying more indirect taxes , business make more profit pay more coroporation tax
This argument is less convincing where budget deficit is rising as a proportion of GDP
