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

However an evaluation point of this method is that simply reducing government expenditure could have disastrous results for the economy. 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. An increase in the death rate mark the country as less developed and so FDI further stops and the country’s economy is slows and may move towards stagnation if these effects snowball.

Another measure a country can carry out to reduce its budget deficit is to increase its rate of taxes in a bid to increase the revenue it receives from its population. Increasing taxes such as income taxes would help to decrease inflation at the same time considering all the factors of AD remain equal. This is due to consumers being put off spending so the rate at which prices increase fall. This would make the country more desirable for foreign investors, so the country benefits from hot money inflow and its currency is demanded more so its value appreciates, giving the country greater purchasing power. Increasing VAT from 17.5% to 20% like the UK has done in recent years would have such an effect as the average price of goods increase putting consumers off purchasing price elastic goods helping to reduce inflation. Also automatic stabilizers will help to limit the fall in AD as higher taxes act as a disincentive to work as the increased revenue gained from higher taxes may be able to fund unemployment benefits so even the unemployed can still spend in the economy helping to still stimulate growth so average wages increase, helping consumers to pay more taxes, so the budget deficit works towards being eliminated.

However an evaluation point is that simply increasing taxes will put consumers of spending as the increase in taxes such as VAT will increase the general price of goods. 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.