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Chapter 27: Problem 6

In a column in the Financial Times, the prime minister and the finance minister of the Netherlands argued that the European Union, an organization of 28 countries in Europe, should appoint "a commissioner for budgetary discipline." They said that "the new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive deficits." What is an "excessive" budget deficit? Does judging whether a deficit is excessive depend in part on whether the country is in a recession? How can budgetary policies be used to reduce a budget deficit?

Short Answer

Expert verified
An 'excessive' budget deficit generally refers to a large deficit that leads to a high debt-to-GDP ratio, slowing economic growth. Whether a deficit is considered 'excessive' can depend on whether the country is in a recession, as governments often run higher deficits during recessions to stimulate economic recovery. Moreover, countries can utilize budgetary policies like spending reduction, tax increases, or privatization to combat a budget deficit.

Step by step solution

01

Definition of Excessive Budget Deficit

An 'excessive' budget deficit typically refers to a situation where a country's government spends far more than it receives in revenue over a specific period. Criteria for what is considered 'excessive' may vary. However, generally, if the deficit leads to a high debt-to-GDP ratio, driving up interest rates and slowing economic growth, it is often deemed as 'excessive'.
02

Impact of Recession on Deficit Judgment

Whether a country is in a recession can indeed impact the judgment of whether a budget deficit is 'excessive' or not. During a recession, governments often intentionally run budget deficits to stimulate the economy by increasing government spending or reducing taxes. This is known as a policy of fiscal expansion. Therefore, a higher deficit during a recession may not be 'excessive' if it aids in economic recovery.
03

Budgetary Policies for Budget Deficit Reduction

There are several budgetary policies that a nation can implement to reduce a budget deficit. These include: \n1. Reduction in spending: The government can cut back on its expenditure, commonly on public sectors.\n2. Increased taxes: The government can increase tax rates to increase its revenue. This, however, relies upon the readiness of the population to accept increased taxes.\n3. Privatisation: Selling state-owned organizations could provide the government a temporary source of revenue to decrease the deficit.

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Most popular questions from this chapter

Briefly explain how an expansionary fiscal policy will cause each of the following variables to increase or decrease. a. Real GDP b. The unemployment rate c. The price level

In what ways does the federal budget serve as an automatic stabilizer for the economy?

In January 2017, the Congressional Budget Office (CBO) noted that its "estimate of the deficit for 2017 has decreased since August 2016." The CBO also noted that its "economic forecast ... underlies its budget projections." a. Why would the CBO's forecast of future levels of GDP and employment matter for its forecasts of future federal budget deficits? b. If the federal budget deficit turns out to be smaller than expected, it is likely that economic growth was higher or lower than expected? Briefly explain.

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(Related to the Apply the Concept on page 961) Why would a recession accompanied by a financial crisis be more severe than a recession that did not involve a financial crisis? Were the large budget deficits in 2009 and 2010 primarily the result of the stimulus package of \(2009 ?\) Briefly explain.
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