Ways to Reduce Annual Financial Deficit (PRSK4345) Level 4

Answer :

Considering the position of the Government and discuss various ways in which it can attempt to reice the deficit to nil, and the political ramifications of doing so.

Annual financial deficit refers to the difference between total expenditure and total revenue of the government. It indicates the requirement of total borrowings by the government. Borrowings are not included while calculating the total revenue. The current budget deficit for the fiscal year March 2019 ending is estimated to be 1.9 billion pound and the difference between expenditure and revenue is estimated to be 52.8 billion pound. In this report different methods for reducing budget has been described . As the obvious way to nil the budget deficit is to cut government spending and increasing tax rate but difficulty is that this tightening may lead to lowering the economic growth which in reverse can cause more cyclical deficit. If deficits are not sustainable (Müller, Lammert and Hovemann, 2012), then it may cause rise in bond yields and if in worst scenario, it will decrease the confidence in the government.

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Different policies can be used for reducing the financial deficit like the government can cuts its public spending. In the same series, Canada applied this policy for reducing deficit, they reduced public spending very significantly. They did the evaluation process of many departments and cut down the spending by 20% in 4 years across the board. Canada achieved a great success after applying to this policy even there economy was growing (Braun, 2018). Economy also got benefited from less interest rate to increase spending, more exports to US, and weaker exchange rate. If any country will cut down its spending, then there will be negative effect on tax revenue, and more harmful effect on the economic growth of country and its development. If the finance minister will cut spending on building hospitals, roads, schools so this will directly reflect in the financials of construction sector and economic activity will be reduced in this sector and these companies will be getting less margin and after that they will pay less corporation tax.

Every government of the world finance their budget by combining both national debt and domestic revenue. So this will make sense that government not only borrows money for financing budget but to pay for investment which will lead to make country productive. Mostly the deficit of budget are financed by bonds of country like treasure bills and government bonds (Heinemann, Moessinger and Yeter, 2018). National debt got increased whenever the government borrows to finance budget deficit and whenever debt grows, deficit is increased in two ways. So debt's interest should be paid every year which leads to spending increase with not giving any benefits. There is strain in economy if interest payments are too high and these funds are used in other sectors of economy. It is difficult for government for raising funds from the level of national debt.

If tax rate becomes higher than it will directly increase revenue and even it will help in reducing budget deficit. As spending will cut then it lead a huge fall in growth of economy. But this too depends on timing of increase or decrease in tax. If tax got increased during recession then it will lead to a specific growth in spending. And if in high growth , taxes got increased then there will be not any single harm on spending very much but this also depends on tax type . People will pay more VAT, Corporation tax by companies and income tax by workers. If tax increases by such huge amounts then it will brings recession and depression also because all the business will charge this costs of more taxes to heir customers and increased prices will lead to lower demand of goods and services (Sa’ad, Abraham and Michael, 2018). Lower demand of services and goods will also impact businesses by cutting employment , lowering the income of government from income taxes.

To promote economic growth , deficit can be reduced as percentage of Gross Domestic Product. As the economy grows , tax revenue will be increased by government that too without raising taxes. It is the least painful way to nil the deficit because in this there is no need of cutting government spending or to raise tax rate. Many countries which are facing fiscal deficit crisis are mostly stuck in recession (Drobyshevsky, 2018). It can be also done by innovation, the key component of deficit reduction strategy should be new congressional super committee. In this case, innovation is trying a range of sure approaches and using some rigorous evaluation methods to know that in actual what methods are working or not. The economy of agriculture, information technology and manufacturing has been identified many ways to improve performance and to reduce cost. This has helped in achieving great progress over time and it also includes exponential gains in calculating power over past at slowly and steadily decreasing price. Expense reduction should be also undertaken for the preference to any of the tax increment with the economic growth reduction due to less government expenses which are offset or minimised. These expense reduction also requires incentives along with private consumption increment with perfect change in tax structure, and with the caution that reduction of tax does not add to any deficit. In macro perspective they should be able to identify specific areas of reduction along with a phased style or approach than a cold shower wipe out.

Innovation helps in producing more effective government at low cost. Example of this could be U.S. welfare policy and many other areas, where major budget saving can be produced by innovative reforms and along with this they are also improving the lives of people. Potential has been shown up by Welfare policy, The FED supported many local welfare and innovative state programs . The government was in need for these reforms that they can be evaluated by using scientific gold standard method of assigning some random welfare recipients to new program and others to welfare as usual. The major initiatives , two in California and other in Oregon were most effective. The focus on welfare recipients who were working quickly into workforce with short term job search training and assistance, these initiatives gave gains in participants. They also resulted rise in net savings to government and reduce the welfare and food stamps (Green and Lavery, 2018). To know enough of innovations which are cost saving and gives yield meaningful reduction in deficit and many more diverse policy's evaluation . By nature innovation is trial and error but in innovative sector of economy like laboratory finding and information technology which primarily appear but are found not to work which also requires daily experimentation to find those that will. In the same series , it applies in welfare and other policy areas, which are actually subset of promising strategies which are evaluated and even they are found effective also.

Political parties must take efforts to repay the national debt by printing new currency which can result in dramatic increase in inflation. Many countries did not face or suffer with the consequences of global recession but they have increased the national debt and facing rise in inflation. Many countries are raising interest rates which are short term and to combat with inflation. Singapore and China both have minimum deficit , and they were first to raise short term interest rates for beating inflation (Müller, Lammert and Hovemann, 2012). Oversight of financial sector can be increased can be the most important measure which can be implemented by the countries to avoid future financial crisis and who are contributing in fiscal deficit. Regulations can also be streamlined, or it can be interpreted as most difficult constraints on corporate activities and any individual. Regulations which are non intrusive should be treated similar to laws that gives protection to the citizens from the action of those companies or person who do not works properly as per the norms of society. The best example is of Drug and Food regulations has given strong emotional effect on the citizen's benefit. So for this appropriate rules should be formed for reducing size of non monetary segment of economy. This should give reduction in tax evasion and must increase tax receipts. There should be proper disclosure from foreign banks of names and balance by individuals who have transferred funds illegally to avoid tax liability in there home country.

Without any of the reforms, all the projections shows that government spending will always consume an increasing share of economy in coming years. Government will grow without any end and without demanding some major budget changes, and also gives support to forecasted rise in spending , so the government need to raise tax substantially but it should not raise as much as above the criteria or the above current levels because citizens resistance and reality of global economy. The person who makes policy or the policy changers have to make huge cut spending later or sooner but they have too. And very soon they have to avoid accumulating more and more debt because it will directly increase the deficit and decreases the global economy, Government should be begin reforming with the cuts which are presented in this report. The leader of the country should pursue the cost cutting when the debts are started getting over control, and no political leaders cannot do the same.

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  • Braun, D., 2018 Fiscal policies in federal states. Routledge.
  • Drobyshevsky, S.,, P., 2018. Fiscal and Monetary Policy. In Russia (pp. 169-181). Palgrave Macmillan, London.
  • Green, J. and Lavery, S., 2018. After neoliberalisation? Monetary indiscipline, crisis and the state. Transactions of the Institute of British Geographers. 43(1). pp.79-94.
  • Heinemann, F., Moessinger, M.D. and Yeter, M., 2018. Do fiscal rules constrain fiscal policy? A meta-regression-analysis. European Journal of Political Economy. 51. pp.69-92.
  • Müller, J.C., Lammert, J. and Hovemann, G., 2012. The financial fair play regulations of UEFA: an adequate concept to ensure the long-term viability and sustainability of European club football?. International journal of sport finance. 7(2). p.117.
  • Sa’ad, S., Abraham, A. and Michael, O.B.A., 2018. An Econometric Analysis of the Nexus of Exchange Rate, Inflation and Budget Deficit: Case of Nigeria 1981–2016. Journal of World Economic Research. 7(1). pp.1-13.
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