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

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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.

One of the methods in which a country can reduce its budget deficit is by simply reducing government spending, so in relation the money it receives through taxes, the proportion which is being spent becomes smaller and the deficit decreases and works towards becoming a surplus. For example cuts in certain areas such as healthcare and education would help to save money and reduce the government’s expenditure. This may mean that if the country is in a deficit it can reduce the likelihood of it having to borrow money from another country or from a bank, helping it stay out of serious debt. This debt can be ‘toxic’, as money received through tax revenue wouldn’t be used by the government to stimulate economic growth through certain policies, but be used to pay back the interest on the borrowed money, which in yearly periods would amount to a massive amount, significantly more than the amount actually borrowed. It would also make the country more attractive to FDI as on paper the country would seem a healthier investment due to a stronger government grip on finances. This would help to set up more projects around the country helping to increase employment and so the national output of the country increases alongside GDP so overall living standards increase pushing the country further into development. As employment increases and wages increase further taxes can be collected so the budget deficit can be eliminated.

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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 ...

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