Government Borrowing

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Public sector net borrowing (PSNB) define
The annual difference between net spending and net taxation. The amount the government need to borrow in a year referred to as the budget deficit
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Public sector net debt (PSND) define
Total amount of debt that the government owes the private sector approx (£1,100 bn in 2013) referred to as national debt
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Fact
UK borrowing rose during the two WW's. Recently net debt has increased as a consequence of the financial crisis
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Chancellors Rule
Under Labour, govt said they would only borrow over the course of the economic cycle to finance sustainable investment. In the recession of 2008/09, borrowing increased because of the fall in tax receipts and need to bailout financial sector
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Cyclical deficit
During a recewssion there will be an increase in govt borrowing
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Increase in borrowing because:1
Tax revenues will be lower eg less income tax and VAT
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Increase in Borrowing because: 2
Government spending will increase eg more unemployment benefits
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In a recession, governments may try to
pursue discretionary fiscal policy (eg change in tax rates) to try and boost growth causing a bigger deficit
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Economic effects of govt borrowing-1) Higher debt interest payments
To finance budget deficit, govt will have to sell more bonds which will increase national debt- Increases annual debt interest payments therefore future generations have to pay higher taxes
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Economic effects of govt borrowing- 2) Increased AD
Budget deficit implies lower taxes and increased Govt spending, will increase AD and cause higher real GDP and inflation
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Economic effects of govt borrowing- 3) Higher taxes and lower spending
In future, govt may have to increase taxes or cut spending to reduce deficit. Higher taxes may cause reduced incentive to work
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Economic effects of govt borrowing- 4) Increased interest rates
If govt sells more bonds, will cause interest rates to increase because they will need to be increased to attract investors to buy the extra debt. If government interest rates increase it will push up other interest rates as well (may not always occu
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Economic effects of govt borrowing- 5) Crowding out
Increased govt spending= increase AD causing a corresponding decrease in size of private sector because for govt to finance deficit they sell bonds reducing the amount that private sector can spend
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Economic effects of govt borrowing- 6) Loss of Confidence
Countries with high levels of govt borrowing may struggle to attract foreign investors eg Eurozone economies
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Economic effects of govt borrowing- 7) Inflation
Govt borrowing indicates a rise in net injections into economy creating inflationary pressure- in extreme circumstances govt may increase money supply to pay debt, this could reduce value of currency and foreign investors see their savings diminish
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Economic Advantages of govt Borrowing- 1) Recession
If there is a downturn in economy there will automatically be a fall in taxation and higher govt spending on benefits causing an increase in budget deficit
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HOOK
If govt attempted to solve the budget deficit by increasing the rate of taxes, this would deflate the economy leading to lower growth and more unemployment
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In recession
a government deficit in necessary to offset rise in private sector saving and try to increase AD and improve economic growth- private sector want to save more so usaually there is high demand for government bonds
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Economic Advantages of govt Borrowing- 2) Investment
Govt increased spending on infrastructure increases productivity and enables a higher rate of economic growth and more tax revenues in the future
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HOOK
govt spending may not increase productivity, some argue government spending is generally less efficient than leaving it to free market
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Economic Advantages of govt Borrowing- 3) Bailout key industries
in case of banking sector- government thought it necassary to bailout to prevent them going bankrupt and possible loss of confidence in banking system
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Public sector net debt (PSND) define

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Total amount of debt that the government owes the private sector approx (£1,100 bn in 2013) referred to as national debt

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Fact

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Chancellors Rule

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Cyclical deficit

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