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In 2016, the Government [budget] deficit was €1.8 billion, an improvement on the 2015 deficit of €5.0 billion - Leaving Cert Economics - Question c - 2018
Question c
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In 2016, the Government [budget] deficit was €1.8 billion, an improvement on the 2015 deficit of €5.0 billion. (Source: CSO, July 2017) (i) Define the term budget d... show full transcript
Worked Solution & Example Answer:In 2016, the Government [budget] deficit was €1.8 billion, an improvement on the 2015 deficit of €5.0 billion - Leaving Cert Economics - Question c - 2018
Step 1
Define the term budget deficit.
Answer
A budget deficit occurs when a government's current expenditures exceed its revenues. This means that the government is spending more money than it is bringing in from taxes and other income sources. Budget deficits can indicate that a government is borrowing money to cover its expenses, which could lead to accumulating debt over time.
Step 2
Discuss the possible economic consequences of a reduction in the budget deficit for the Irish economy.
Answer
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Less borrowing for the Irish economy: A reduction in the budget deficit is likely to decrease the need for government borrowing, which can result in lower interest rates. This can relieve pressure on taxpayers and allow for greater investment in public services.
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Less burden on future generations of taxpayers: A lower deficit means less public debt, which could enhance the financial position of future generations, allowing them to enjoy better living standards as they will not have to bear the weight of repaying excessive debt.
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Improved image abroad: A country reducing its deficit may improve its credit rating, thus enhancing its international borrowing capacity. This may attract foreign investment, which is vital for economic growth.
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Public sector impacts: However, efforts to reduce the deficit may require cuts in public spending or services. This could lead to increased unemployment in the public sector and may affect the quality of services provided to the citizens.
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Effects on economic activity/growth: Reducing the deficit may involve austerity measures, which could dampen economic growth. For example, cuts in government spending can lead to lower demand for goods and services, thereby slowing down economic growth.
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Social consequences: If the government reduces spending, it may exacerbate inequality if lower-income households bear the brunt of these cuts. This action could lead to increased unrest or dissatisfaction among the public.
Step 3
Is a budget deficit always bad for an economy? Outline two reasons for your answer.
Answer
A budget deficit is not always detrimental to an economy:
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Stimulates demand: In some cases, an increase in government spending can stimulate economic growth by raising aggregate demand. If the government invests in infrastructure or public services, it can lead to job creation and increased consumer spending.
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Self-financing deficits: A government may incur a deficit that is self-financing, meaning that increased spending can lead to higher revenues in the future. For example, investments in education and infrastructure may promote long-term economic growth, resulting in more tax revenue down the line.
Although deficits can lead to unsustainable debt levels, especially if not managed properly, they can also play a role in economic development under certain conditions.