• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Discuss the view that governments of countries with large budget deficits should take measures to reduce them as quickly as possible

Extracts from this document...


´╗┐Discuss the view that governments of countries with large budget deficits should take measures to reduce them as quickly as possible (15 marks) A budget deficit is where public expenditure by the government exceeds the total money collated through tax revenues. Fiscal policy refers to the use of government expenditure and taxation in order to influence the level of economic activity in a country. From the 1980s until 2008, its primary role was to ensure stable public finances. However, from 2008 and the financial crisis it has once again assumed a role in macroeconomic management not only in the UK but also in China, the USA and a variety of other countries. Fiscal policy and budget deficits are linked as government expenditure is a component of fiscal policy and so in order to stimulate economic growth many fiscal policies mean an increase in government spending, which may induce a budget deficit if tax receipts remain the same or decline in relation to the amount being spent. ...read more.


For example reducing the education budget may simply mean poorer standards of education and training schemes alike for older individuals would hold less value as cuts reduce the resources available to power such projects. This would reduce human capital as the growing population in a ?dumbed down? education system may mean fewer workers with skills, so vital jobs within the economy become unfulfilled as those with skills move to countries with their skills in higher demand and better wages. This would reduce the output of the country so GDP falls and FDI decreases, so the country is in worse off position. Not only for education, cutting the NHS budget would have a similarly disastrous result as absenteeism increases due to less facilities being able to handle less ill patients so the economy similarly slows down. The death rate increases as medical healthcare facilities become harder to reach due to the shutting down of A&E?s and hospitals and ambulance response time?s increase. ...read more.


Considering the fact that AD is built of C+I+G+(X-M) and consumption is 60% of AD, a drop in consumption may outweigh the benefits of the other components seeing an increase. This drop in AD would reduce GDP of the country and so foreign investors would see investing in such an economy as less appealing. Also hot money inflows causing the currency or £ in this case to appreciate may have entirely negative effect. An appreciation would see less export led growth as exports of the UK become more expensive for foreign countries and consumer alike to purchase, and for the domestic consumer’s imports become the cheaper option. Seeing as UK consumers can already be said to have a marginal propensity to import fuelled by an insatiable appetite, the balance of payments would appear to be working towards a more negative value so the current state of the economy of the UK worsens, detracting the value of FDI so growth is further limited and the budget deficit may see no reduction as the government is forced to pick up the pieces through increased government spending. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Budget 2004-05 and Economic Analysis of Pakistan

    been due to both demand and supply factors resulting in an increase in the prices of wheat, wheat flour, rice, meat, edible oil and onion. POVERTY: The efforts of the last five years have started yielding positive results and this year has seen the incidence of poverty declining, enrolment in

  2. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    government could choose to implement demand management policies to increase aggregate demand. The 1950s and 1960s became the era of demand management, where unemployment levels were extremely low by historical standards. If the economy was below full employment, the government intervened to raise aggregate demand and eliminate the output gap.

  1. Greece financial crisis: The main causes of this crisis are? What are ...

    are decided at the national level. The choice the Eurozone authorities face today is between two evils. The first one arises from moral hazard. Bailing out Greece is bad because it gives a signal that irresponsible behavior will not be punished.

  2. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    The GDP has increased from 1,272,537 R million to 1,415,273 R million in year 2004. During the period of time, the population has increased by 1.17%. At the same time, the number of documented immigrants has increased 1.27%. However, the unemployment rate has decreased 11.41%.

  1. Discuss the measures taken by the current Labour government to enhance the independence of ...

    To this aim the government has put in place certain requirements from the Bank. Firstly, the Bank has to publish its inflation report every quarter, within which justification and explanation will be given as to their analysis of the economy and how they intend to meet the inflation target, in

  2. This report will highlight how Government policy could change to try to: Increase economic ...

    INFLATION Inflation is the "pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services". At present inflation is at 3%, this means that during the past fiscal year that there was a rise in the average level of all prices by 3%.

  1. Pakistan is in the grip of a serious energy crisis that is affecting all ...

    generated and around 45 per cent of total electricity generated is used for domestic consumption. Use of energy in old machines and lack of awareness of efficiently using it in industry and for domestic consumption causes substantial loss that might be difficult to quantify but can be definitely reduced.

  2. Examine possible factors which might have led to changes in the value of the ...

    It was based on the German Bundesbank which was in fact the style of monetary policy that Britain tried to instigate in the ERM crisis of 1992. It must also be remembered that the target for inflation for the ECB is only 2% of the harmonised price index (HICP)

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work