QUESTION 81 (6 marks)
A government must choose between a one-year $5 billion disaster payment and a permanent $5 billion annual entitlement. Both are funded by borrowing initially. Compare their implications for structural deficits and future fiscal flexibility, assuming the same immediate recipients and spending response.
Practice marking scheme
Answer
The permanent entitlement adds a recurring underlying commitment; the one-off measure has a different future profile.
Working
Immediate demand effects may be similar under the stated assumptions. The permanent payment raises spending each future year unless revenue or other spending adjusts, potentially increasing the structural deficit. The temporary payment does not itself recur, although its debt can create ongoing servicing costs. Both have opportunity costs; a temporary measure is not automatically harmless and a permanent entitlement may have enduring welfare benefits.
Marking criteria
- Distinguishes recurring structural commitments. [2 marks]
- Explains debt servicing and flexibility. [2 marks]
- Evaluates both options with an appropriate qualification. [2 marks]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.