The Budget Deficit 1

7/28/2019 The Budget Deficit 1

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The Budget Deficit

In June 2010, it was reported that the nation debt903bn.

It is 62% of GDP.

In the future, it means higher taxes for future

generations and crowding out the private sector.

In the financial of 2010, the government debt was10% of GDP.


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Income taxes

Higher taxes can help the government reduce the budgetdeficit. This raises tax revenues for the government.

In the future, the direct taxes on future generation will rise.This may act as a disincentive for people to work. Also, it

may also have a negative effect on wealth creators of theeconomy, reducing the incentive to invest in the economy.As result, UK economy may suffer from a lack ofinvestment.

Nevertheless, the government of the day may increase

taxation but at a smaller amount if it doesnt want to bevoted out of office. In this viewpoint, this can result ingovernment failure.


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NHS

Although the government has increased the NHS budgetin real terms to 0.1% , it can be easily offset by rising

maintenance costs.

However, opponents have argued that the purchasing

power of the NHS is likely to fall by 0.9% in real terms.This is means the NHS may spend less on improving

services or buying more beds for patients. This is likely to

lead to a bed blocking crisis, meaning there may be a

long waiting lists for treatments and beds.


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A poor performance by the NHS may be blamed on

the government. It is likely to lose votes in election

since NHS is seen as a major political battleground

for politicians. Therefore, the fear of losing power

may force government to invest more in the NHS or

to take action to improve its performance.

Also, if the NHS fails to treat health problems due toa lack of investment to boost its quality of service, it

may lead to a large number of people with health

problems untreated which can lead to a loss of

productivity in the long run.


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Assessing whether reducing budget

deficit now is necessary? Firstly, EU has called for the UK government to reduce its deficit now in

order to meet international agreements. EU growth pact states that each

economys budget deficit must be below 3%. EU commission have argued

that the government reduce its deficit to 3% by 2014.

The question of tackling the deficit now or later is highlights the problem

of having jam today or tomorrow. For example, the government can

increase taxes and reduce spending now to tackle the deficit or later. In

the short run, it may weaken AD and raising unemployment due to cuts in

the public sector. However, in the long run, it means less taxation which in

turn will provide incentives for people to work instead of living on

benefits, increasing quantity of labour. Therefore there is an opportunity

cost of low unemployment in the future, is the economic and social cost of

cutting the budget deficit which the economic agents may suffer now.

Also, there is an equity issue if the deficit is tackled later. Some may argue

that why should future generations have to pay more off the budget

deficit which they didnt cause but only inherited.


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Increasing budget deficit is likely to lead

investors to lose faith in the government, thus

stop buying government bonds. This can lead

to Britain losing its triple A rating.

Documents

The Budget Deficit 1