The budget deficit

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Transcript of The budget deficit

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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

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Supply Side Policies

Inflation

Jobs

Growth Imports Exports

ReduceBudgetDeficit Interest rates

Printing money (quantitative easing)

Government spendingTaxation

Helping free markets to work more efficiently

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Budget deficits occur when:

The Government spends more than it receives in taxes.

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here

Watch this short clip which tells us:

The date George Osbourne plans to have eliminated the budget deficit.

here

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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.

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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

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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

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Output

Price Level

ADAD1

P1

Q1

AS

Showing growth using AD and AS

Using an expansionary budget deficit

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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

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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)

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What happens if a country can’t sell any more bonds?

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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.

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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.

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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.

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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 _____________

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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