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.

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
- Understanding of balanced government budget
- "In February 2023 Argentina's government spending exceeded its tax revenue by approximately \(\$ 1\) billion"
- To achieve a balanced budget, the Argentinian Government is likely to reduce government spending and increase taxation

Possible effects include:
- Reduction in Argentina's real output/economic growth as a result of the lower injections into, and greater withdrawals from, the country's circular flow of income
- Rising unemployment/falling real wages of workers in Argentina's public sector: the government may introduce spending cuts
- Fall/slow increase in real incomes and lower standard of living of the population of Argentina
- Deflationary effects/lower demand-pull inflationary pressures
- Increase in income inequality if Argentina's government cuts welfare payments: it receives lower taxation revenue from the unemployed
- Lack of government investment is likely to impact long-term economic growth e.g. spending on infrastructure, education, healthcare, etc
- Positive impact on the environment e.g. less pollution as a result of the lower consumption and production of goods and services
- Greater undesirable consequences in Argentina's society e.g. crime
Credit use of relevant AD/AS diagrams
NB Candidates may consider the positive effects for KAA and the negative effects for evaluation (or vice versa)
Evaluation (8 marks) - indicative content
- Impact on macroeconomic objectives depends on the magnitude of the reduction in government spending and the increase in taxation
- Time lags for the policy to come into effect - up to 18 to 24 months
- Budget deficit may increase in the long-run as a result of the reduction in government spending and increase in taxation
- Impact on real output and economic growth depends on the size/value of the multiplier
- Fall in wages can make Argentinian economy more competitive in LR
- Impact on inflation/real output depends on where the AD lies on the Keynesian LRAS / on the level of spare capacity
- Reduction in welfare payments by the government could reduce the level of frictional/voluntary unemployment
- Effects depend on to what extent private sector spending/employment can replace public sector spending/employment
- Potential increase in hidden economy (e.g. rise in cash in hand work)
- Effects would depend on what areas of government spending and/or taxation are changed