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Budget Deficit

Hey, does anyone know why reducing aggregate demand will reduce the budget deficit?
Original post by Mary2222
Hey, does anyone know why reducing aggregate demand will reduce the budget deficit?

The budget deficit in the UK is where the government are spending more than they receive (It's around £108bn).

Usually, a fall in aggregate demand would increase the budget deficit. But, you could argue that a fall in Aggregate Demand leads to falling prices. With falling prices, in nominal terms there is a smaller deficit. But in real terms, it's unlikely that a fall in aggregate demand will reduce the deficit.
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Mary2222
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Original post by Alex-Torres
The budget deficit in the UK is where the government are spending more than they receive (It's around £108bn).

Usually, a fall in aggregate demand would increase the budget deficit. But, you could argue that a fall in Aggregate Demand leads to falling prices. With falling prices, in nominal terms there is a smaller deficit. But in real terms, it's unlikely that a fall in aggregate demand will reduce the deficit.


Ohh, ok thank you! But would you mind explaining how an increase in aggregate demand will lead to a reduction in the budget deficit please?
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Mary2222
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And also, im confused..how can reducing government spending lead to a reduction in the budget deficit?
Original post by Mary2222
Ohh, ok thank you! But would you mind explaining how an increase in aggregate demand will lead to a reduction in the budget deficit please?

When Aggregate Demand increases, GDP usually follows. When GDP is higher, people will pay more taxes (due to higher employment/wages etc) thus reducing the deficit. Also, less people claim benefits when aggregate demand is forced up since unemployment is lower.

Original post by Mary2222
And also, im confused..how can reducing government spending lead to a reduction in the budget deficit?

The UK government currently overspends £108bn. If they were to reduce this spending, by say £60bn, then the deficit has been reduced to £48bn.
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BC95
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Original post by Mary2222
Hey, does anyone know why reducing aggregate demand will reduce the budget deficit?


Hi there, I will try to make this a bit more clear for you.

Government spending is a part of aggregate demand.

Therefore if aggregate demand falls this means government spending falls resulting in a reduction in the budget deficit.
Original post by Mary2222
And also, im confused..how can reducing government spending lead to a reduction in the budget deficit?


Tax Revenue has an opportunity cost. By reducing day to day government spending which (in theory) is funded through tax revenue, the money can be used to pay off a budget deficit.

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