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  • Anforme What Problems does a Budget Deficit cause for Government Financing?

Anforme What Problems does a Budget Deficit cause for Government Financing?

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Ruth Tarrant, economics teacher at Peter Symonds College, Winchester, and a senior examiner, explores the implications of running a persistent budget deficit on a government’s ability to finance, or pay for, that overspend. It examines the current state of the UK’s finances, and how the deficit is financed through the issue of bonds, before looking at the effects of continued debt on a country’s credit rating, future budgets and current investors.

Summary of Key Points:

  • The UK’s budget deficit for the financial year 2010/2011 is forecast to be around £149bn, and the national debt is just under £1,000bn.
  • Budget deficits are financed through borrowing from the bonds market by issuing government bonds (in much the same way that households finance their overspend by using credit cards).
  • If purchasers of government bonds become less confident about the value of the bond they hold, interest rates on those bonds will rise, causing total government debt to rise further.
  • Budget deficits can also be financed through higher taxes, which is politically unpopular and difficult to introduce in times of slow economic growth.

Ruth Tarrant, economics teacher at Peter Symonds College, Winchester, and a senior examiner, explores the implications of running a persistent budget deficit on a government’s ability to finance, or pay for, that overspend. It examines the current state of the UK’s finances, and how the deficit is financed through the issue of bonds, before looking at the effects of continued debt on a country’s credit rating, future budgets and current investors.

Summary of Key Points:

  • The UK’s budget deficit for the financial year 2010/2011 is forecast to be around £149bn, and the national debt is just under £1,000bn.
  • Budget deficits are financed through borrowing from the bonds market by issuing government bonds (in much the same way that households finance their overspend by using credit cards).
  • If purchasers of government bonds become less confident about the value of the bond they hold, interest rates on those bonds will rise, causing total government debt to rise further.
  • Budget deficits can also be financed through higher taxes, which is politically unpopular and difficult to introduce in times of slow economic growth.

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