Economics
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Exercise 2
- Using information from the tutorial and figures from the Charts, explain the link between budget deficits and Government net debt.
A budget deficit means that government expenditure is greater than revenue; therefore the government needs to borrow money in order to fund the excess spending. For example increasing budget deficits of 2008/9 through to 2010/11 reaching close to 5% of GDP are associated with rising government net debt to 2014/15. The budget deficit is projected to fall over the years and move into surplus by 2015/16; at the same time government next debt is projects to fall from 13.8% of GDP in 2014/14 to below 4% of GDP by 2020. - Explain the likely impact of rising economic growth on the budget outcomes over the 5 years from 2009/10.
Rising economic growth over the 5 years from 2009/10 would lead to increased income, spending, output and employment. This should mean an increase in tax revenue and a decline in unemployment benefits and other welfare spending on the unemployed, leading to a shrinking budget and an eventual budget surplus. - Discuss the possible uses of the projected budget surpluses from 2015.
Budget surpluses from 2015 could be used to repay the debt accumulated since 2008-9, thus reducing the amount of interest paid by the government on debt, freeing fund up for other purposes and ensuring fiscal sustainability into the future. Budget surpluses from 2015 could also be invested in the future fund and in infrastructure programs to improve productivity and promote economic growth. The government could, on the other hand, use future budget surpluses to fund tax cuts to stimulate private sector spending. This could prove to be inflationary, however, so the surplus could be used as a counter cyclical measure to restrain rapid economic growth. The government could use a combination of methods in using budget surpluses in the future, but the underlying aim is to ensure fiscal sustainability, and so to retain budget surpluses for a future economic downturn where government revenue would fall and expenditure would have to increase.
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