TotallyNotNyx

Since I'm bored and have HW:

Evaluate whether a government should always eliminate a substantial budget deficit.

A budget deficit occurs when total government spending is larger that total government revenue. The difference between these two values is the deficit. The UK has been in a continuous budget deficit since 2000 with the average budget deficit since 1970 being 3.4% of national income.

One reason for why a budget deficit should be reduced is that there would always be a need to cut spending in the future. Higher deficits are not sustainable for ever since national debt as a % of GDP would increase while debt interest payments would build up over time to the point where the government is too much in debt to finance much spending on important sectors like education, health and defence. This would lead to a reduction in the standards of living in a population, with an increasingly uneducated and unhealthy work force on top of a reduction in capital spending leading to a fall in UK productivity.

However, reducing a budget deficit can be very problematic. If a country has a deficit that increases too quickly, the government may be forced to adapt policies aimed at a sharp deficit reduction such as a dramatic fall in government spending. These austerity measures would cause a fall in aggregate demand since government spending is a component on AD. For example, during 2012-16, many countries in the Eurozone sought to reduce their budget deficit to comply with EU rules. This deficit reduction caused lower economic growth. Lower AD also leads to more unemployment since labour is a derived demand. Furthermore, the unemployment would lead to lower income tax revenues and since the unemployed would have a lower disposable income than the employed, consumption would also fall. Lower income tax and taxes on the consumption of goods and services (such as VAT) would only serve to make the budget deficit harder to reduce, while a reduction in consumption would cause a further reduction in economic growth since consumption makes up 60% of aggregate demand, for the government. Therefore, it may be less harmful to the economy if the budget deficit is not eliminated.

Another reason for why a budget deficit should be reduced is that a substantial budget deficit would lead to a lot of crowding out. To finance the budget deficit, the government may be borrowing from the private sector, leading to the private sector having lower funds to spend and invest. The government is therefore ‘crowding out’ the private sector. Government spending is liable to be a more inefficient than the private sector since the government does not have the motive of profit. Without the need to maximise profit, the government may not find the most efficient way to spend the money. Furthermore, crowding out causes a contraction in the demand by the private sector for investment goods (capital) as well as reducing the demand for consumer goods. This, in turn, leads to a fall in GDP since consumption is a component of AD.

However, the need to eliminate a budget deficit depends on when the deficit occurs. Basic Keynesian economics suggests that a rise in the budget deficit during a recession is a good thing. In a recession, private sector spending falls and saving rises – leading to unused resources. Government borrowing is a way of utilising these unused savings and ‘kickstarting’ the economy, with the deficit spending helping to promote higher growth, which will enable higher tax revenues, leading to the deficit being reduced over time. Furthermore, any attempt to balance the budget in a recession, may just end up making the recession worse (due to reasons explained earlier in the essay).

How would I conclude this essay?