The Budget Deficit

In June 2010, it was reported that the nation debt 903bn. It is 62% of GDP. In the future, it means higher taxes for future generations and crowding out the private sector. In the financial of 2010, the government debt was 10% of GDP.

Income taxes
Higher taxes can help the government reduce the budget deficit. This raises tax revenues for the government. In the future, the direct taxes on future generation will rise. This may act as a disincentive for people to work. Also, it may also have a negative effect on wealth creators of the economy, reducing the incentive to invest in the economy. As result, UK economy may suffer from a lack of investment. Nevertheless, the government of the day may increase taxation but at a smaller amount if it doesnt want to be voted out of office. In this viewpoint, this can result in government failure.

NHS
Although the government has increased the NHS budget in real terms to 0.1% , it can be easily offset by rising maintenance costs. However, opponents have argued that the purchasing power of the NHS is likely to fall by 0.9% in real terms. This is means the NHS may spend less on improving services or buying more beds for patients. This is likely to lead to a bed blocking crisis, meaning there may be a long waiting lists for treatments and beds.

 A poor performance by the NHS may be blamed on the government. It is likely to lose votes in election since NHS is seen as a major political battleground for politicians. Therefore, the fear of losing power may force government to invest more in the NHS or to take action to improve its performance. Also, if the NHS fails to treat health problems due to a lack of investment to boost its quality of service, it may lead to a large number of people with health problems untreated which can lead to a loss of productivity in the long run.

Assessing whether reducing budget deficit now is necessary?

Firstly, EU has called for the UK government to reduce its deficit now in order to meet international agreements. EU growth pact states that each economys budget deficit must be below 3%. EU commission have argued that the government reduce its deficit to 3% by 2014. The question of tackling the deficit now or later is highlights the problem of having jam today or tomorrow. For example, the government can increase taxes and reduce spending now to tackle the deficit or later. In the short run, it may weaken AD and raising unemployment due to cuts in the public sector. However, in the long run, it means less taxation which in turn will provide incentives for people to work instead of living on benefits, increasing quantity of labour. Therefore there is an opportunity cost of low unemployment in the future, is the economic and social cost of cutting the budget deficit which the economic agents may suffer now. Also, there is an equity issue if the deficit is tackled later. Some may argue that why should future generations have to pay more off the budget

deficit which they didnt cause but only inherited.

 Increasing budget deficit is likely to lead investors to lose faith in the government, thus stop buying government bonds. This can lead to Britain losing its triple A rating.