The document discusses budget deficits and national debt. It begins by outlining the objectives of understanding what a budget deficit is, knowing the size of the UK's deficit, why deficits rise in recessions, and why large deficits can be problematic. It then provides ways that governments can reduce budget deficits, such as by decreasing spending, increasing taxes, and pursuing economic growth. The document also discusses how countries fund deficits through bond sales and what can happen if a country is unable to sell enough bonds to cover its deficit.

2. OBJECTIVES OF THE LESSON
1. You understand what is meant by a ‘budget deficit’
2. You know the size of the UK budget deficit
3. You understand why budget deficits rise in a recession
4. You know why big budget deficits are problem
5. You know 2 ways to reduce a budget deficit

3. Inflation Growth Imports
Exports
Jobs
Helping free
markets to work
Supply Side Policies
more efficiently
Reduce
Budget
Government spending Deficit Interest rates
Taxation
Printing money
(quantitative easing)

4. Budget deficits occur when:
The Government spends more than it receives in taxes.

5. Watch this short clip which tells us:
The date George Osbourne plans to have eliminated
the budget deficit.
here
here

6. Question:
Why do we have bigger budget deficits when economic growth is
negative?
Because we have to spend more on welfare payments and bring in
less tax revenue from direct and indirect taxation.

10. If we add all the previous years’
budget deficits together, we get
what is called the National Debt
or more accurately the:
Public Sector Net Debt
Which now totals over
£1,000,000,000,000

11. Budget deficits are not always bad
They are a tool of policy. If you are in recession
then it is reasonable to spend more than you
receive in taxes in order to increase AD and bring
the economy into recovery

12. Showing growth using AD and AS
Price Level AS
P1
AD
AD 1
Q1
Output
Using an expansionary budget deficit

13. What must a Government do if it is running a budget deficit?
What do you do when you spend more than your income?
BORROW
I promise to pay the bearer of
this piece of paper £10,000
in five years time
Signed
M.King
Bank of England
A BOND

14. Who does it sell the bonds to?
Governments borrow by selling
I promise to pay the bearer of bonds
this bond £10,000 in five
As the price of bonds goes
years time down the rate of interest on the
bond rises.
Signed The more bonds a Government
M.King sells, the lower will be their
Bank of England prices (so the higher the rate of
interest)
Private investors
Pension funds
Banks
Insurance companies
Overseas Governments
anyone who will buy them

15. What happens if a country can’t sell any more bonds?

16. Greece’s Budget Deficit
Greece cannot sell enough bonds to fund its budget deficit. No one will
buy them as investors cannot be certain that Greece will not DEFAULT
(investors will not be paid when the bonds mature).
Greece needs to borrow money from the EU, the IMF and the World
Bank. This is called a BAILOUT
Who will only lend the money if certain AUSTERITY conditions are met.
What are these conditions. Why will they lead to this
Greece can either comply with the austerity measures, or leave the Euro.
Both of these options will lead to terrible economic conditions.

17. How can we decrease a budget deficit
1. Cut Government spending and increase taxes
May reduce the budget deficit in the SR, but will lead to
recession, more Government spending on welfare and less
taxation. So in the LR, this method may actually increase the
size of the budget deficit
This is what the current UK Government is doing
This is what Greece is promising to do.

18. How can we decrease a budget deficit
2. Go for Growth
Borrow more money, increase spending and reduce
taxes, use supply side measures to stimulate the economy
and increase economic growth.
This will increase our revenue from taxes and decrease the
amount spent on welfare payments.
This idea is ‘Keynesian’
Increase spending and
decrease taxes to grow
the economy.

19. A budget deficit occurs when a Government ________ more than it
receives in __________.
To fund a budget deficit, a Government must borrow by selling ______
The lower the price a Government gets for a bond, the higher the
______________ that it must pay on the bond.
If the Government has too big a budget deficit, then it will get a much
_________ price for its bonds.
Greece is going to ___________ on some of its bonds (only pay
bondholders a part of what they are owed. This has lead to Greece
having to borrow from the ________, the _______ and the _______
As a result of this, these organisations are insisting that Greece
reduces its budget deficit by cutting _________ and increasing _____
This is likely to lead to Greece experiencing _____________

20. Is our PSND really such a problem?
As long as we can borrow (or print) money perhaps the
budget deficit and the PSND is not really such a problem