Fiscal Policy - Government Borrowing
- Levels: AS, A Level
- Exam boards: AQA, Edexcel, OCR, IB, Other
When a government's tax revenues are insufficient to pay for a given level of state spending then a nation must borrow to make up the difference, this is a budget deficit. Governments often find that they have to borrow to finance their spending
Causes of a rising budget (fiscal Deficit)
Not all countries and groups of countries run budget deficits, there are many both from the richer advanced groupings and fast-growing developing nations who have been running budget surpluses in recent years.
Fiscal balances for selected groupings of countries
(-) Indicates a budget deficit, a +ve value shows a budget surplus
|Country Group Name||2008||2009||2010||2011||2012|
|Major advanced economies (G7)||-4.5||-10.0||-8.7||-7.7||-6.8|
|Latin America and the Caribbean||-0.9||-3.9||-3.0||-2.6||-2.3|
|Emerging and developing economies||1.0||-4.0||-2.8||-1.1||-1.0|
|Commonwealth of Independent States||4.2||-5.1||-2.6||2.0||0.9|
|Newly industrialized Asian economies||1.0||-1.1||1.1||1.6||1.0|
|Middle East and North Africa||13.4||-0.6||2.0||6.1||6.9|
|Source: IMF World Economic Outlook, April 2012|
- Most of the member nations of the Group of 7 have seen a significant rise in government borrowing and higher levels of debt.
- A number of newly industrialized Asian countries run budget surpluses as do the oil and gas rich nations of the Middle East
Fiscal austerity under the 2010-2015 Coalition Government
The UK coalition government has a deficit-reduction policy with the emphasis on cutting government spending in some areas in real terms and a series of direct and indirect tax increases:
Key policies for deficit reduction:
- Rise in VAT to 20%
- Rise in employee national insurance contributions
- Deep cuts in real government spending e.g. for local authorities
- Welfare caps including £26k pa cap on welfare for each family
Some taxes have been cut
- A series of cuts to corporation tax - down to 20% in 2015
- Freezing of fuel duties (meaning a cut in real terms)
- Increases in the real value of the income tax free allowance
- Freezing of council tax (so that council tax falls in real terms)
The UK government also helped by lower interest rates on newly issued debt. 10 year bond yields fell to a record low of 1.4% in January 2015.
New fiscal rule (July 2015 Budget)
The government’s fiscal rules are to be revised to include a target for a budget surplus by 2019/20 and for all subsequent years when in ‘normal times’. The economy will be viewed as being in ‘normal times’ if real annual growth is above 1%.
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