Essential guidance on economics exam technique:
AS Macroeconomics / International Economy
Government Borrowing & the Budget Deficit
In this chapter we consider the effects that government borrowing to finance their spending can have on the wider performance of the economy.
The level of government borrowing is an important part of fiscal policy and management of aggregate demand in any economy. When the government is running a budget deficit, it means that in a given year, total government expenditure exceeds total tax revenue.
If the government is running a budget deficit, it has to borrow this money through the issue of government debt such as Treasury Bills and long-term government bonds. The issue of debt is done by the central bank and involves selling debt to the bond and bill markets. Most of the government debt is bought up by financial institutions but individuals can buy bonds, premium bonds and buy national savings certificates.
Government finances have moved from surplus in the late 1990s to a deficit of over 2% of GDP in 2006. The emergence of a rising budget deficit has been due to a weaker economy and the effects of increases in government spending on priority areas such as health, education, transport and defence. Critics of Gordon Brown argue that he risks losing control of the budget deficit if tax revenues continue to come in below forecast whilst public sector spending remains high. Gordon Brown’s reputation of fiscal prudence has come under pressure over the last few years. He is forecast to be running a budget deficit of over 3% of GDP (in excess of £32 billion) in 2006.
There is a consensus that a persistently large budget deficit can turn out to be a major problem for the government and the economy. Three of the reasons for this are as follows:
Potential benefits of a budget deficit
What are the main economic and social justifications for a higher level of government spending and borrowing? Two main arguments stand out
|Author: Geoff Riley, Eton College, September 2006|
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