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

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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. An advantage is that it reduces the dangers of crowding out the private sector. When the government spends or runs a large deficit, much of the spending is financed through borrowing which is done through government bonds. To make these bonds more attractive the government will offer a higher rate of interest on these bonds. In addition, government bonds are seen to be safer than private sector investments, especially if the government has a triple A credit rating. Therefore when the government offers bonds, investors provide their money to the government, reducing the potential investment for the private sector. Moreover, if the government borrows through the banks then the increased demand for repayable loans will increase, pushing up interest rates and also increasing the cost of borrowing to the private sector and further reducing investment ability. So by cutting expenditure, this is avoided, enabling the private sector to invest more and provide longer term economic growth and increasing future tax returns. Furthermore, it can be argued that the public sector in some countries, such as the UK, is too big. As the public sector is less profit-centric, their allocation of…...

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