Download Government spending

What is debt? What is a
deficit? What are the
problems with running a
deficit?
• http://www.bbc.co.uk/news/business-25944653
Government spending
Fact & figure hunt
• How much have the government spent in the past
years?
• What have they spent it on?
• What are the two types of spending?
• How much tax revenue do they get? From where
specifically?
• How big is the UK deficit?
Problems with a deficit
• A persistently large budget deficit can be a problem. Three of the
reasons for this are as follows:
• Financing a deficit
• A government debt mountain
• Capital flight
Taxes and rational expectations
• A school of economic thought stresses that economic agents make choices based on the
information they have and a rational view of the future. Called rational expectations
• So when the government sells debt to fund a tax cut or an increase in expenditure, a
rational individual will realise that at some future date he or she will face higher tax
liabilities to pay for the interest repayments
• Thus, he should increase his savings as there has been no increase in his permanent
income
• The implications are clear. Any change in fiscal policy will have no impact on the economy
if all individuals are rational. Fiscal policy in these circumstances may become ineffective