Key Summary Notes for the AQA A-level Economics course on Fiscal Policy - Deficits, Surpluses and National Debt, guaranteed to boost you to the top grades.
Fiscal Budget Deficit: Government spending is > tax revenue in a year.
Structural Budget Deficit: A budget deficit when the economy is at full
employment
AD=SRAS=LRAS
Cyclical Budget Deficit: Budget Deficit in a Recession
Expected in a recession
National Debt: Total stock of government debt over time.
Running a budget deficit and increase national debt = Gov Spending >
Taxation.
BUDGET DEFICIT IS EXPANSIONARY FISCAL POLICY (G>T)
Pros (Same as Expansionary Fiscal Policy):
1) Higher Growth
HIgher AD - Higher Growth - Lower Unemployment - Close Negative output
Gap - Return Unemployment to full employment.
2) Benefits of Increased Gov Spending
Gov Spending on: Healthcare/Education/Infrastructure/Public Services
Increase Equal/Quantity of FOP - Boost LRAS
Generate LR tax revenue back to gov
Solving Market Failures
Improve living standards
3) Redistribution of Income
If govt spending on benefits/education/health/lower regressive tax/lower
direct taxation
Reduce Income Inequality
4) Incentives of Tax cuts
LR incentives of Tax cuts.
, Incentive to Work - Work harder - be more productive - to get more income
Incentive for Entrepreneurship - LR productive efficiency - Boost LRAS.
Incentive for Immigration - Boost quant of Labor - Boost LRAS
5) Crowding In
Keynesians believe: More government spending increases AD - Increase
output = crowd in private sector - private sector incentives by growing
demand/output - incentive to invest/grow their business/grow output to get
more profit.
Cons (Same as Expansionary Fiscal Policy):
1) Deterioration of Gov Finances
If budget debt rises - national debt rises - people think this is unsustainable
- lower consumer/business confidence in the state of finances.
Lower Credit Ratings - Credit rating = risk of lending money to gov - low
credit rating means high risks of buying gov bonds - demand falls for govt
bonds - gov must raise coupon rate/interest rate of govt bonds - to increase
demand of govt bonds - making govt borrowing more expensive.
Burdens on future generations:
- tax rises in future to raise gov revenue to pay back debt.
- Debt Interest - opportunity cost.
If confidence in Gov finances falls - FDI falls - as investors font think gov is
stable - could raise corporation tax to pay back debt - harming profits.
2) Inflation Conflict
Demand pull inflation as AD rises.
3) Current Account Deficit Conflict
As growth and unemployment falls
Higher demand pull inflation can erode international competitiveness of
exports - (X-M) falls - Current Account deficit falls.
4) Crowding out Effect
CLASSICAL: Debt fuelled gov spending can increase demand for loanable
funds - increasing equilibrium interest rates - making it more expensive for
private sector firms to borrow and fund projects - reducing investment -
reducing AD and reducing LRAS.
5) X-Inefficiency
Wastefulness of government spending - governments are not profit
motivated.
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