Question

Course: Topic: BUSI2003 Macroeconomics Fiscal Policy (billions of CS) Government Tax Government Surplus or National Revenues Expenditure Deficit Debt 100 2007 2008 2009 2010 2011 2012 604 647 633 612 610 615 578 610 631 645 650 648 1. Why did the tax revenues decline from 2008 to 20117 2. If the economy experienced a severe recession from 2008, why didn't the Government expenditure decrease in those years? 3. How did the Government's budget balance evolve over time? 4. How did the Government budget balance affect the National Debt?

Answer 1

year	tax revenue	expenditure	surplus/deficit	national debt
2007	604	578	26	100-26= 74
2008	647	610	37	74-37=37
2009	633	631	2	37-2=35
2010	612	645	-33	35+33=68
2011	610	650	-40	68+40= 108
2012	615	648	-33	108+33=141

1. The government tax revenues declined from 2008 to 2011 owing to the recession of 2008. Since recession severely hits the level of economic activity and increases unemployment, it decreases tax revenue. The direct tax revenue (or income tax) is decreasing owing to falling incomes and decrease in labor force having jobs. The indirect revenue (from sales tax) is reduced due to falling consumption levels as a consequence of lower incomes.

2. The government expenditure did not fall despite depression since according to Keynesian economics which is followed by most countries, the role of government expenditure becomes even more so important in times of economic crisis. Government expenditure directly increases Aggregate Demand in the economy, which further increases production and thus eventually demand for labor and creates jobs. Hence the government expenditure in fact increased in the years following recession.

3. The government's budget balance was surplus in the years till 2009 although it increased and then decreased in absolute values. The government budget changed to a deficit in the later years.

4. The government budget affected the national trend as: initially the budget surplus decreased the national debt almost to 1/3rd levels in 2009. Following the recession, the government encountered deficit due to falling revenue and thus the national debt started rising again in the subsequent years.