Assess whether a fiscal deficit and national debt should be a cause for concern for the UK government

Edexcel A-Level Economics Paper 2 June 2024 Extract

Assess whether a fiscal deficit and national debt should be a cause for concern for the UK government. (10 marks)

1. A fiscal deficit exists when government spending exceeds tax revenue in a given year.
2. If a country runs a fiscal deficit frequently, this accumulates as national debt.
3. This is likely to be a cause for concern as it leads to the opportunity cost it presents.
4. As the UK's national debt increases, the government must also pay back more interest each year.
5. The UK's national debt reached around 94% of GDP in 2020/21.
6. There is an opportunity cost as, eventually, the government must decide to cut spending on some services or increase taxes in order to reduce national debt.

1. However, a budget deficit can contribute positively to the UK as it can promote economic growth.
2. Figure 4 shows that people earning above £125,140 are being taxed more on their income, and other people are also being taxed more in real terms.
3. If the government were to actually reduce taxes, this would allow people to have more disposable income and consume more, despite the budget deficit rising.
4. As consumption increases, aggregate demand increases and the economy grows, which can actually make it easier for the government to collect more tax revenue, through VAT and corporation tax.

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