the budget deficit
TRANSCRIPT
OBJECTIVES OF THE LESSON
1. You understand what is meant by a ‘budget deficit’
2. You know the size of the UK budget deficit
3. You understand why budget deficits rise in a recession
4. You know why big budget deficits are problem
5. You know 2 ways to reduce a budget deficit
Supply Side Policies
Inflation
Jobs
Growth Imports Exports
ReduceBudgetDeficit Interest rates
Printing money (quantitative easing)
Government spendingTaxation
Helping free markets to work more efficiently
Budget deficits occur when:
The Government spends more than it receives in taxes.
here
Watch this short clip which tells us:
The date George Osbourne plans to have eliminated the budget deficit.
here
Question:Why do we have bigger budget deficits when economic growth is negative?
Because we have to spend more on welfare payments and bring in less tax revenue from direct and indirect taxation.
If we add all the previous years’ budget deficits together, we get what is called the National Debt or more accurately the:
Public Sector Net Debt
Which now totals over £1,000,000,000,000
Budget deficits are not always bad
They are a tool of policy. If you are in recession then it is reasonable to spend more than you receive in taxes in order to increase AD and bring the economy into recovery
Output
Price Level
ADAD1
P1
Q1
AS
Showing growth using AD and AS
Using an expansionary budget deficit
BORROW
What must a Government do if it is running a budget deficit?
I promise to pay the bearer of this piece of paper
£10,000 in five years time
SignedM.King
Bank of England
What do you do when you spend more than your income?
A BOND
Private investorsPension fundsBanksInsurance companiesOverseas Governments
anyone who will buy them
Who does it sell the bonds to?
I promise to pay the bearer of this bond £10,000 in five
years time
SignedM.King
Bank of England
Governments borrow by selling bonds
As the price of bonds goes down the rate of interest on the bond rises.
The more bonds a Government sells, the lower will be their prices (so the higher the rate of interest)
What happens if a country can’t sell any more bonds?
Greece’s Budget Deficit
Greece cannot sell enough bonds to fund its budget deficit. No one will buy them as investors cannot be certain that Greece will not DEFAULT (investors will not be paid when the bonds mature).
Greece needs to borrow money from the EU, the IMF and the World Bank. This is called a BAILOUT
Who will only lend the money if certain AUSTERITY conditions are met.
What are these conditions. Why will they lead to this
Greece can either comply with the austerity measures, or leave the Euro. Both of these options will lead to terrible economic conditions.
How can we decrease a budget deficit
1. Cut Government spending and increase taxes
May reduce the budget deficit in the SR, but will lead to recession, more Government spending on welfare and less taxation. So in the LR, this method may actually increase the size of the budget deficit
This is what the current UK Government is doingThis is what Greece is promising to do.
How can we decrease a budget deficit
2. Go for Growth
Borrow more money, increase spending and reduce taxes, use supply side measures to stimulate the economy and increase economic growth.
This will increase our revenue from taxes and decrease the amount spent on welfare payments.
This idea is ‘Keynesian’Increase spending and decrease taxes to grow the economy.
A budget deficit occurs when a Government ________ more than it receives in __________.
To fund a budget deficit, a Government must borrow by selling ______
The lower the price a Government gets for a bond, the higher the ______________ that it must pay on the bond.
If the Government has too big a budget deficit, then it will get a much_________ price for its bonds.
Greece is going to ___________ on some of its bonds (only pay bondholders a part of what they are owed. This has lead to Greece having to borrow from the ________, the _______ and the _______
As a result of this, these organisations are insisting that Greece reduces its budget deficit by cutting _________ and increasing _____
This is likely to lead to Greece experiencing _____________
Is our PSND really such a problem?
As long as we can borrow (or print) money perhaps the budget deficit and the PSND is not really such a problem