25 Marker

Intro: ...
Point 1: Why government spending has helped development using all the extract info, improved literacy, health, real gdp, etc
Evaluation: Is the government spending within fiscal headroom or is it highly debt-fueled, which it is; therefore the long run costs may outweigh and harm the potential short and long run benefits of development

Point 2: Debt larger than GDP, and foreign currency reserve based and there's a lack of foreign currency, risking financial sector failure and recession. ++ BOP negative effect, potential self correction with weakening exchange rate, evaluated using marshal lerner condition. Weakening exchange rate causing debt to rise in real value as it is mainly foreign currency based. Therefore, there is a case of cutting govt expenditure...

Point 3: Heavy Inflation due to multiplier of expansionary fiscal policy. The development caused is now suffering and potential poverty increases and impact on living standards again showing the cons are harming benefits...

Point 4: Sri Lanka protectionism may harm international relations and worsen the conditions due to potential retaliation...
Evaluation: Reducing government expenditure has major risk of demand side shocks of decreasing growth and unemployment and having further effects on the microeconomy.

Conclusion: Yes there is a definite need of governement exp cuts and also a need for increase in taxation: need of heavy contractionary fiscal policy. Demand side shocks may be lesser if country is near maximum potential level (shown on keynsian AS) and thus inflation would reduce and G and U wont be majorly impacted. Finally there is a major case of debt relief/forgiveness, potentially even cancelling debt or extending payments due/ reducing interest rates in order to not harm and sustain long term economic development in the middle income country.

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