Macroeconomic objectives and theory — Question 12

12a)

The situation shows that the government budget has a widening deficit, currently 5% of GDP in 2026. This has been increasing over the last five years for two reasons. Firstly, government revenue has fallen from 24.5% of GDP in 2022 to 21.5% in 2026, indicating household and business taxable incomes are not rising, due to the economy slowing or not growing as fast as the population. Second, government expenditures have increased solidly from a low of 23% of GDP in 2021 to a high of 26.5% in 2026. This may be due to Australia’s ageing population, which leads to higher government health and pension spending.

Issue

[1 mark]

• identifies the issue as a budget deficit of 5% of GDP in 2026

• identifies the ↑ deficit over the past 5 years

[1 mark]

Revenue

[1 mark]

• quantifies the ↓ revenue over time, using data and dates

• explains a valid cause of ↓ revenue

[1 mark]

Expenditure

[1 mark]

• quantifies the ↑ expenditure over time, using data and dates

[1 mark]

• explains a valid cause of ↑ expenditure

12b)

Past surpluses could be used to fund the deficit; however, the data shows that there have not been sufficient surpluses to fund the current deficits. The government could also explore ways to increase the taxation base to reverse the fall in budget revenue. The limitation here is the short political cycle of three years, which makes changing tax rates challenging.

Solution 1

[1 mark]

• identifies a valid funding solution

[1 mark]

• explains a limitation of the funding solution given

Solution 2

• identifies a different valid funding solution

[1 mark]

• explains a limitation of the funding solution given

[1 mark]