Assess the likely macroeconomic effects of the German government’s budget deficit

Edexcel A-Level Economics Paper 2 June 2025 Extract

With reference to the information provided and your own knowledge, assess the likely macroeconomic effects of the German government’s budget deficit. (10 marks)

1. The German government's budget deficit is likely to promote economic growth.
2. Figure 2 shows that the German government were running a budget deficit of 2.6% of GDP in 2022.
3. A budget deficit exists when government spending exceeds tax revenue in a given year.
4. For example, if the government were to reduce income taxes, this would allow people to keep more disposable income.
5. This allows people to increase their consumption, leading to an increase in aggregate demand.
6. As aggregate demand increases, the economy grows as real GDP increases.

1. However, frequently running a budget deficit can also harm the economy.
2. Budget deficits can accumulate as national debt. Figure 2 also shows that the German government ran a budget deficit for three consecutive years from 2020 to 2022.
3. As national debt increases, the government must pay more towards interest.
4. This carries an opportunity cost, as the goverment must cut spending on other services or raise taxes.

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