Explain why a higher rate of economic growth is likely to reduce the budget deficit

AQA A-Level Economics Paper 2 June 2019

Extract E (lines 11–12) states ‘If growth could be increased, the budget deficit would fall much faster.’

With the help of a diagram, explain why a higher rate of economic growth is likely to reduce the budget deficit. (9 marks)

1. Economic growth refers to an increase in real GDP.
2. Real GDP is the total value of goods and services produced in a year.
3. A budget deficit is when government spending exceeds tax revenue in a given financial year.

1. As the economy grows, tax revenues are likely to increase.
2. As the economy grows, real gdp per capita (income per person) is likely to increase.
3. As incomes increase, the government are able to collect higher amounts of income tax revenue.
4. Additionally, higher income enables greater levels of consumer spending, which allows the government to collect more revenue from VAT.
5. Finally, as business profits increase with economic growth, the government are able to collect greater amounts of revenue from corporation taxes.

1. Also, government spending is likely to decrease as the economy grows.
2. As economic growth means that there is a higher value of goods and services being produced, this means that there is a greater derived demand for labour.
3. So as unemployment falls, the government are able to spend less on welfare payments such as unemployment benefits.
4. Real GDP is the total value of goods and services produced in the economy, adjusted for inflation.
5. A budget surplus occurs when tax revenue exceeds government spending in a given year.

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