The UK currently has a budget deficit of £80bn. It is forecast to fall to £0 over the next 5 years. Discuss whether the UK government should either raise taxes or cut government spending to ensure that the budget is balanced.
A budget deficit is a state of financial health in which expenditure exceeds revenue and it usually results in the government having to borrow money. They government can use fiscal policy to correct the deficit and ensure that a balance is kept however, it also depends on what state the economy is in and whether trade-offs will occur meaning that some other macroeconomic targets are put in jeopardy.
By reducing government spending, it’s a way of demand management. ...view middle of the document...
Moreover, resources will be more efficiently allocated, so there will be greater output and economic growth, enabling the economy’s ability to finance the deficit more easily as the deficit to GDP ratio will be reduced. Also as the economy grows further, employment rises which increases income tax revenue. Higher consumer confidence will also translate to higher consumption and so greater VAT receipts and corporate tax revenues as profits increase thus aiding the reduction of the deficit.
However, cutting government spending will mean many job losses as the public sector employs many people and when spending is cut they will need less workers for the simple reason that as the number of government projects are reduced then so is the need to hire as many workers who will be sat idle incurring additional costs for the governments eg, through benefits. Moreover, as spending in sectors such as healthcare and education is cut, these services may need to lay-off staff to stay within their new budgets, for instance if the NHS’s budget is cut they will lay-off additional staff rather than reducing money spent on medicines etc leading to higher unemployment, which conflicts with the macroeconomic objective of full employment. Also, higher unemployment will mean less income tax revenue, lower VAT receipts and corporate tax revenues as well as lower standards of living due to the government’s austerity measures.
Another disadvantage by cutting government spending is that the distribution of income will worsen. This is because social protection forms a large part of the governments budgets and so by cutting expenditure, it is very likely that these will also be cut making the poor poorer and widening the gap. Also, the government employs many low skilled workers and as these workers may lose their jobs, the gap will further widen. In addition, government spending on social housing may also be cut therefore reducing the geographic mobility of labour for the poor who require cheaper housing, leading to further problems with the economy.
Another important point to consider is what areas of government spending will be reduced for example cutting spending on infrastructure, roads and transport is likely to have an important effect on the long run productivity of the economy as the productive capacity is likely to suffer. On the other hand, cutting spending on Social Security will have the least impact on economic productivity. In fact, it could be argued that cutting welfare on welfare benefits may actually increase the incentive to join the labour force which will increase productivity. However, again there are trade-offs as there is the risk of increasing inequality and relative poverty.
Another way the budget can be balanced is due to raising taxes. An obvious advantage of this is that government will receive more revenue such as revenue from higher...