Government budget position

• define the budget deficit 


  when government spending exceeds tax revenue
• what are the two types of deficit

  -cyclical deficit

  -structural deficit
• define a cyclical deficit

  when the reason for a deficit is due to a recession and without one the government would be in a surplus
• how can a recession cause a deficit

  a fall in tax revenue and an increase in spending on welfare as well as to boost AD
• define a structural deficit 


  deficit regardless of the economic cycle
• what are the consequences of a budget deficit

  -increases the value of the national debt

  -have to be repaid with interest

  -money being used to pay debt has an opportunity cost

  -may mean increased taxes are needed

  -crowding out
• define crowding out 


  how additional government revenue can lead to a higher interest rate having a negative effect on private sector spending
• explain the crowding out graph

  as government spending increases AD shifts to AD2. however the market interest rate increases as demand for lone able funds increases. this causes AD2 to shift to AD3 due to a reduction in private spending spending.

  
• what is the loanable funds market

  the market interest rate is set by demand for loanable funds. if this increases due to excess government borrowing the yield on their bonds will rise as well as the private sector being crowded out.

  
• what does the impact of government borrowing depend on 


  -the previous position of the deficit

  -the size of the national debt

  -the interest rate the government can borrow at

  -the governments credit rating

  -what's the borrowing is spent on - investment vs routine expenditure

  -economic cycle

  -if to finance tax cuts who did these effect
• what is the OBR

  an independent body to the government that produces economic forecasts and data
• why was the OBR created

  in order to give the government reports forecasts which is important for the financial markets
• what are the 5 functions of the OBR

  -economic forecasting

  -evaluating economic performance

  -sustainability and balance sheet analysis - long term financial implications of policy

  -evaluating fiscal risk

  -scrutinizing welfare and policy costings