• 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...

Introduction

´╗┐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.

Middle

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.

Conclusion

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

    This whole process is known as the wage price or cost push spiral. Figure 7.0 overleaf shows how an initial rise in costs lead to a chain of wage increases and increases in demand, which feed back to increases in costs, hence, the short run equilibrium level of prices in the economy is constantly moving upwards.

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

    In times of recession, they also served as a buffer and helped to maintain a relatively low level of unemployment. Foreign workers also contributed to increasing domestic demand through their expenditure on food, transport and other consumption items." (Lai Yew Wah, Business Times, Reducing Dependency on Foreign Labour, 28 July 2010)

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

    Up to now the only obstacle has been political, i.e. the lack of consensus among the different member states about the necessity to do so. One can only hope that this political obstacle will go away soon. The Greek government of course has the key to eliminate the obstacle by providing a credible budget cutting policy.

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

    honestly believe that the shortage of energy generation is our main cause of the problem for last twenty years WAPDA and KESC complaining about the distribution system but fails to bring any improvement. EFFFECTS: No country can achieve high economic growth without producing sufficient energy.

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

    rather than the upper and lower bands of ´┐Ż1% of 2% of HICP enforced by the Bank of England. This is another factor to show how strict the ECB is in controlling inflation, compared to the Bank of England who may not forwardly mention growth as their aim, but do refer to it in their remit.

  2. Budget 2004-05 and Economic Analysis of Pakistan

    Electricity, gas, water supply and construction have registered growth above the target rate. Most notable performance has been witnessed in construction and gas and electricity sub-sectors. Against a decline of 2.5% last year, a phenomenal growth of 23% was recorded in the case of gas and electricity sub-sector.

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

    "Accountability requires that the central bank explains and justifies its policies or actions and gives account for the decisions made in the execution of its responsibilities" (Lastra, 1997) and for this reason transparency is a very important element of accountability.

  2. The Federal Budget 04 - 05 is a pre-election budget, so it has incentives ...

    The unemployment rate at the moment is 5.6%, with the government aiming for a lower rate. The tax cuts provide incentives for people to find jobs as they are paying less tax & thus increases participation rate & decreases unemployment.

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