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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