Budget Deficit

A Budget deficit

In the recent years, more and more attention ever than before has been paid into financial market especially the high budget deficit. The action government done has directly affected the election in 2010 therefore the leaders have to try their best to bring the budget deficit down. But with the global economy crisis, to reduce budget deficit becomes more difficult .It has several serious impacts on British economy and sequences for both government and normal people.

To discuss this topic, the basic knowledge of budget deficit is necessary. Basically, budget deficit is one form of budget balance as well as budget surplus. Budget balance is defined as "the difference between total government revenue and total government spending, or equivalently net taxes minus government spending, T-G."(Lipsey & Chrysal 2007:385) Budget surplus occurs, as the meaning of surplus, when total revenue minus spending is positive while for budget deficit, it is negative. Apart from 1960-70,1988-9and 1998-2001, government keeps having budget deficit since 1945(Lipsey& Chrysal 2007:385). Therefore government has to sell government bonds known as national or public debt to cover the deficit. The national debt is common welcomed due to its high pay back and risk free by citizens and some investment agencies. But it has some negative effect on economy. First of all, the cost of paying interest is very high, which is nearly 2.5%GDP in2008 and even more in 2009( even though government could benefit from the debt. Also, it would lead higher taxes in the next few years due to its high payback. And it also has a impact on exchange rate.

There are some reasons, stated by T. Pettinger(2009), which lead to the high predicted government borrowing. First of all, it is cyclical factors mainly about the tax revenues. Because of the global financial crisis, people earn less than before and the employment rate drops directly leading to a drop in income tax revenue. The money they spend into market falls therefore the tax revenues decreases. Secondly, it is the dramatic drop in prices of houses. Because in the current financial crisis many people are facing a financial problem and taking the risk of losing their jobs, houses have to been sale by them in lower price or unfortunately being confiscated by the bank if they cannot afford paying back the money they borrowed from the bank. The falling prices particularly make an effect on duty. Thirdly, as mentioned before, it is unemployment increase. With more and more people lost their jobs, government has to spend a lot on their social welfares and benefits to make them life not too hard even though they are not able to make any effect on GDP. Fourthly the "bank bailout" costs much more then expected. For example, Royal Bank Scotland the famous bank in UK, the price per share for banks decreases hugely since 2008 from approximately 200 in 2008 to 9,the lowest point ever, in March 2009 and after government bought the bank its share price stable at around 40(yahoo investment 2010). Following it is the trade deficit or the so-called unbalanced economy. Trade makes the majority of the government revenue but due to some technical, population and delivery problems, UK government have to struggle to the competitive world market and manufacturing or industrial sector to get maximum revenue even though the revenue is much less than spending. In the end, the weak sterling role importantly in the control to budget deficit to limit the drop in economic growth through making a trade surplus and will help to rebalance the economy. The inflationary risks would become more noticed by government in the recent years and the drop in living level is also a consequence of a weak sterling. Apart from those, there are still some other factors like population etc. But if the current situation does not change at all, it is likely these forecasts for budget deficit will be higher due to the high spending.

Because of the high budget deficit, government has serious pressures by many areas. It has been illustrated that by the end of 10 March 2010,the YouGov's daily poll has figures of CON 37%, LAB 32%,LDEM 17% for the election(Wells 2010). It is going to be a hard work for Brown and his LAB to win the election due to his decision to avoid budget deficit and some other non-wise decisions. Therefore government, especially Brown's LAB, has a real high pressure to make the deficit fall.

Government had made some announces in two main areas to limit the growth of budget deficit according to the Pre-Budget Report announce 2009(HM Treasurey 2009) and received some feedback. First, it is the support for business and growth, which leads a £200m addition to Strategic Investment Fund in 2010-11 helping lots small companies run better. Secondly, it is the tax addition: "a temporary payroll tax of 50 per cent will apply to discretionary bonuses above £25,000 for each individual employee."(HM Treasurey 2009). A higher income