UK Budget Deficit

1.  The term of “Budget deficit” is best normally used to discuss to government spending sooner than business or single spending. When mentioning to increase state government deficits, the term used is “natural debt”.

Budget surplus is the opposite of a budget deficit, and when entries equal outflows, the budget is said to be stable.

Important terms that related to UK budget deficit are;

• Cyclical budget deficit – A cyclical budget deficit takings to account variations in tax spending and revenue due to the cycle of economic, for example, in a weakening, tax revenue drop spending on the increases of unemployment benefits.
• Structural deficit – This is the equal of the deficit even when the economy as at complete employment.
• Primary Budget Balance – A primary budget balance means we remove interest expense on debt. (Primary budget deficits of EU) for example, if the budget deficit is £119 bn, but we spend £42 bn on interest payment, the primary budget deficit will be £77 bn.
• Current Budget – The current budget is a rapid of net cash flows at that specific time.
• Net borrowing – Net borrowing contains net investment and is measured to be the main deficit number.
• PSNB – Stands for Public sector net borrowing – another amount of annual borrowing. (ONS)
• PSNCR – Stands for Public sector net cash requirement – another amount of annual government borrowing (0NS)

2. Historical background of the budget deficit problem:–

During the time period of the years 2007 to 2009 was very important for the United Kingdome the main reasons are followed for the financial crisis in UK.

UK housing boom:-

In UK the values of the real esate part was continuously rising. Besides that, the loaning terms and conditions were very large and also the rate of interest on mortgages was low. So mostly people use that mortgages for savings in real estate sector. Financial institutions were began to offer sub-prime mortages. Sub-prime means to offer money to unable borrowers. The results of this building industry was also in boom and they were modifing and exponding their workers and machinery. They also took away the loans for changes. All of sudden the real astate sector distorted the financial institutions came in difficulty.

UK banks crisis:-

The banks lended and give extra amount that had. Only the HSBC bank presented fewer loans. When the credits disaster rises, all banks were successively out of liquid reserves. No one of them are ready to helping each other bacause they did not have trust when they are all were facing problem.

Decrease in foreign trade:

Each and Every country is doing foreign employment by importing and exporting goods and services. The country exports only theseds and services which they can create easily by using starts resources. The service sector is having more effect on foreign trade for UK. UK is having more influnce on foreign trade by calling service sector.

UK is calling service center of world. The service industry of UK includes insurance and banking. So there is hesitation in it that the credit disaster happened in US directly affected to the foreign trade of UK. On the other hand, the imports of UK remain same because most of UK imports include basic necessities, automobile etc. As a results of this account of current showed deficit or there was also a loud decrease in it.

3. Discuss in detail what alternative policies there are to deal with the said problem, in particular addressing the issue concerned with timing

– The major changes in the bank reform

Banks in the UK need to raise their capital to £25 billion. However, most of the banks are suffering from the credit crunch. They will need to ask these funds from the UK government.

One other possibility is by exchanging their preference shares to increase funds.

The Bank of England will provide £100 billion in fund by exchanging the preference shares.

The bank of England will provide £250 bn at every low rate i.e. commercial rate.

It should be noted that all bailout seeker banks should have to do on agreement with FSA regarding their executive pays, bonus and dividend.

Following is the bailout plan for the UK banks is prepared by the government of UK.

– Inflation

The government should control the inflation rate to avoid any recurrence of the 2008 credit crisis, where the banks lent more money with the decreased rate of interest sanctioned by the government.

With more money lent by banks, this can create an increase in supply of money in the market. This can cause inflation, where prices of all goods and services will also rise thus decreasing the average consumer spending. With a decrease in average consumer spending, less products will be sold.

– Cut spending

The government can also cut its public spending to reduce the fiscal deficit. For example, in 1990, Canada reduced its public spending significantly by assessing the different departments in the government and cut spending by 20%. The Canadian economy continued to grow during this period of spending cuts and further helped reduce the budget deficit. However, during this policy, the Canadian economy helped from low low rates to improvement spending, a weaker exchange rate and higher distributes to the US. The strong the economy made, the easier to cut spending.

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Other evaluation of cutting government spending depends on the type of government you cut. If you cut pension spending (eg. making people work longer) then there will be a real increase in creative capacity. If you placed public sector investment, it will have a better opposing result on total demand and the source side of the economy. So, the offer is for the government to cut pension and benefits as this can decrease spending with a smaller amount of power on economic growth but it will be at the total of increased variation in people.

– Tax Increase

With a higher tax, the government can gain an increase in revenue which will further reduce the budget deficit. However, this can cause consumers to spend less and cause a decrease in economic growth.

This again, depends on the tax increases of the timing. In a downturn, tax increases could effect a big drop in spending. During the high growth, tax rise won’t harm spending as much.

It is also depends on the type of tax that rise. In recent times, France increased taxes on the rich to over 70%. On the other hand, some have protested this is too high and creates discouragements to work in France. If high marginal tax rates do reduce disincentives to work in France. If high marginal tax rates to decrease incentive to work, the tax revenue raised may be less than planned.

UK Budget deficit

This graph showing that during a period of high economic growth in the 1980s, the UK budget deficit cut down- despite tax. In the decline of 1991, the budget deficit growth sharply. This tells that the periodic nature of budget deficits and the main of economic growth to reducing a deficit.

Reference:

http://www.investopedia.com/terms/b/budget-deficit.asp

Tejvan Pettinger. ( October 3, 2014).UK Budget Deficit.Available: http://www.economicshelp.org/blog/5922/economics/uk-budget-deficit-2/. Last accessed 10 May 2015.

Daniel Shaviro. (1997). The Introduction to do Deficit Matter?.Available: http://www.press.uchicago.edu/Misc/Chicago/751120.html. Last accessed 27/4/2015

Tejvan Pettinger . ( October 19, 2012).Policies to Reduce Budget Deficit.Available: http://www.economicshelp.org/blog/6011/economics/policies-to-reduce-budget-deficit/. Last accessed 11th may 2015.

Essays, UK. (November 2013). Background Of The Budget Deficit Problem Economics Essay. Retrieved from http://www.ukessays.com/essays/economics/background-of-the-budget-deficit-problem-economics-essay.php?cref=1

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