Assess whether a budget surplus would be good for the UK economy (15)
A budget surplus occurs when government tax receipts (T) exceed government expenditure (G) over a
period of time (normally measured quarterly or annually).
On the one hand, a budget surplus would be good for the economy. One reason for this is that it enables
the government to pay off national debt it may have accumulated over past deficits, thus reducing future
interest payments. This could possibly justify lower taxes in the long-run as the government requires less
money to function. Lower taxes for consumers mean higher disposable incomes and greater spending,
increasing aggregate demand and fuelling economic growth. Furthermore, lower taxes for firms mean
that they can afford to increase worker salaries to share in their larger profits, enhancing the increase in
aggregate demand (AD -> AD -T). This is demonstrated on the graph below:
Price
level AS
AD - T
AD
Real
GDP
In addition, lower taxes on businesses will mean that they may be incentivised to increase employee
count to manage increased demand, reducing unemployment (One economic objective of the
government) and further benefiting the UK economy. Moreover, Increased employment will mean an
increase in the long-run productive capacity/aggregate supply of an economy meaning that growth will
not overall result in unstable price levels (fulfilling another economic objective). This is demonstrated on
the graph below.
Price
level
LRAS LRAS1 AS
AS1!
AD - T
AD
Real
GDP
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