Evaluate the case for cutting public expenditure rather than raising taxes as a means of reducing fiscal deficits.
Evaluate the case for cutting public expenditure rather than raising taxes as a means of reducing fiscal deficits. [30]
A fiscal deficit is when a government's total expenditures exceed the tax revenues that it generates. A budget deficit can be cut by either reducing public expenditure or raising taxes. In this essay, I am going to analyse the benefits and costs of increasing tax rates to reduce fiscal deficits instead of cutting government expenditure.
First of all, if the government decides to cut current public expenditure, it will lead to a reduced quantity and quality of public goods and service. For example, closing NHS direct call centres down which results in lower living standard. Moreover as the spending in sectors such as healthcare and education is cut, these services may need to redundant staff to stay within their new budgets. For instance if the NHS’s budget is cut they will lay-off additional staff. Those public sector workers may find it difficult to find a new job in private sector if they are not competitive enough to compete with other people in the labour market, leading to higher unemployment conflicting with the government macroeconomic objective of low unemployment rate. Also higher unemployment will mean less income tax revenue, lower VAT receipts, higher welfare payments, as well as lower standards of living.
If the government is to cut capital expenditure this is the type of expenditure that expands LRAS. It might not cause serious problems in short run, however in long run less spending on for example education and healthcare will result in a less educated and skilled workforce and a less healthy workforce. The negative effects of inadequate skilled human capital in the long run include lower productivity which makes the economy less competitive internationally compared with for example Germany. It in turn leads to deterioration on balance of payment, economic stagnant growth and inflationary pressure as
A fiscal deficit is when a government's total expenditures exceed the tax revenues that it generates. A budget deficit can be cut by either reducing public expenditure or raising taxes. In this essay, I am going to analyse the benefits and costs of increasing tax rates to reduce fiscal deficits instead of cutting government expenditure.
First of all, if the government decides to cut current public expenditure, it will lead to a reduced quantity and quality of public goods and service. For example, closing NHS direct call centres down which results in lower living standard. Moreover as the spending in sectors such as healthcare and education is cut, these services may need to redundant staff to stay within their new budgets. For instance if the NHS’s budget is cut they will lay-off additional staff. Those public sector workers may find it difficult to find a new job in private sector if they are not competitive enough to compete with other people in the labour market, leading to higher unemployment conflicting with the government macroeconomic objective of low unemployment rate. Also higher unemployment will mean less income tax revenue, lower VAT receipts, higher welfare payments, as well as lower standards of living.
If the government is to cut capital expenditure this is the type of expenditure that expands LRAS. It might not cause serious problems in short run, however in long run less spending on for example education and healthcare will result in a less educated and skilled workforce and a less healthy workforce. The negative effects of inadequate skilled human capital in the long run include lower productivity which makes the economy less competitive internationally compared with for example Germany. It in turn leads to deterioration on balance of payment, economic stagnant growth and inflationary pressure as