In February 2023 government expenditure exceeded tax revenue by approximately \$1 billion in Argentina. Evaluate the likely macroeconomic effects of a government using deflationary policies to achieve a balanced budget. Refer to a country of your choice in your answer.

Quantitative skills assessed
QS4: Construct and interpret a range of standard graphical forms

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance.
The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.

Knowledge, application and analysis ( 12 marks) - indicative content
- Definition of indirect taxation- expenditure tax
- Specific tax/Ad valorem tax-
- Increase costs of production
- Shifts/pivots supply to the left, S to \(\mathrm{S}_{1}\)
- Increased equilibrium price charged to consumers \(\mathrm{P}_{\mathrm{e}}\) to \(\mathrm{P}_{1}\)
- Decreases equilibrium quantity of flights for consumers, \(\mathrm{Q}_{\mathrm{e}}\) to \(\mathrm{Q}_{1}\)
- Reduced quantity of aeroplane flights will result in a reduction in fuel use and in total global carbon emissions. Therefore there will be a reduction in external costs
- Tax revenue received by the government \(\mathrm{ABCP}_{1}\)
- Use tax revenue to fund research into technology to reduce emissions/ fund alternatives
- Producer surplus decreases/ airline/ airport profits fall
- Consumer surplus decreases FEPe to FCP \({ }_{1}\)
Accept ad valorem diagrams to illustrate the effects of the indirect tax Accept externalities diagram to illustrate effects of indirect tax

NB Award maximum of Level 3 if no diagram is included Level 4 requires at least two impacts Advantages may be presented as KAA and disadvantages as EV or vice versa
Evaluation (8 marks) - indicative content
- Depends on the size of the tax
- Highly inelastic demand for flights means relatively small impact on quantity
- Different effects on those travelling for business/leisure
- Information failure- government may not know the ideal rate of taxation
- Government failure- if it leads to net welfare loss
- Any measures to reduce flights may be offset by increases in the number of people using cars or lorries. Therefore, there may be little reduction in external costs
- Following the global health crisis, significant numbers have continued to work remotely-reduces the need to fly. Even without imposing indirect taxes the total number of aeroplane flights is likely to have fallen below 2019 levels. Therefore, global carbon emissions may already be below \(2.5 \%\)