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Outline possible positive and negative economic consequences of a Government Current Budget Surplus - Leaving Cert Economics - Question b - 2006
Question b
Outline possible positive and negative economic consequences of a Government Current Budget Surplus. (25 marks)
Worked Solution & Example Answer:Outline possible positive and negative economic consequences of a Government Current Budget Surplus - Leaving Cert Economics - Question b - 2006
Step 1
Positive Consequences of a Government Current Budget Surplus
Answer
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Reduced inflationary pressures: The government is withdrawing more money from the economy than it is putting in. This tends to have a deflationary effect, helping to control inflation.
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Managing our finances: With a budget surplus, the government has the opportunity to manage its finances better, leading to increased confidence in the economy and enhanced potential for economic investments.
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Adhering to EU guidelines: A surplus aids in compliance with EU fiscal rules, which fosters greater stability and can potentially attract foreign investments.
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Scope for taxation reforms: The existence of a surplus indicates that there is room for potential tax reforms, allowing the government to implement policies that may benefit certain economic activities.
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Uses of increased government revenue: A surplus allows the government to invest in critical areas such as infrastructure and public services without needing to raise further taxes.
Step 2
Negative Consequences of a Government Current Budget Surplus
Answer
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Rise in conflicting expectations: Stakeholders may have different expectations regarding how the surplus should be utilized, leading to potential conflicts.
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Public Sector Workers: The surplus may create unsustainable wage expectations among public sector workers, which could lead to budgetary constraints in the future.
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Tax reductions: Citizens might demand tax reductions, and taxpayers may feel that they are over-contributing, thus affecting public services provision.
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Discontinuity in Social Partnership: A surplus might lead to tensions between social partners, risking cooperation that is beneficial for economic stability.
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Government financial planning: Relying on surpluses can lead to planning that is overly optimistic, potentially causing problems when unexpected expenditures arise.