- Crowding out
- Crowding out is when government borrowing soaks up available savings and leaves less financial capital for private firms to invest in physical capital.
- Ricardian equivalence
- Ricardian equivalence is the theory that households save more when the government borrows, expecting higher taxes later, so total saving is unchanged.
What changes the deficit and the debt
Can you name four things that change the size of the deficit and the national debt?
Each changes how much the government borrows in a year.
The state of the economy sets tax receipts and welfare spending: a recession widens the deficit and a boom narrows it.
Can you think of an example?
In a recession VAT and income tax receipts fall and Universal Credit claims rise, with no change in policy.
Tax and spending decisions, such as cutting a tax or spending more on health, change the deficit at any level of activity.
Can you think of an example?
A Budget cuts the basic rate of income tax and raises NHS spending: both add to borrowing in any year.
An ageing population means more people drawing pensions and health care for each person of working age paying tax.
Can you think of an example?
Spending on state pensions and the NHS grows faster than income tax as more people pass pension age.
Crises such as wars and pandemics raise spending and cut receipts at once, adding large sums to the debt quickly.
Can you think of an example?
In the Covid pandemic the state paid furloughed workers' wages as receipts fell, and borrowing hit a post-war record.