Education and training → Fiscal balance: chain of analysis

ChainWhat it assumes · how to break it

Start

The government increases spending on education and training, for example funding apprenticeships and adult skills courses.

As a result, government spending rises now, so the budget deficit widens in the short run.
budget deficit

Assumes: The spending is financed by borrowing.

But: If it is paid for by cutting other spending, the deficit is unchanged but there is an opportunity cost.

This means government borrowing and the national debt rise.
national debt

Assumes: There is no offsetting saving.

But: This holds in the short run whatever the long-run benefits.

Later, higher productivity raises wages and profits, so income tax and corporation tax receipts rise.
tax base

Best link to attack
Assumes: The training does raise productivity.

But: The payoff is uncertain and may take a decade or more, by which time the debt interest has already been paid.

In addition, fewer people are unemployed, so spending on benefits falls.
welfare spending

Assumes: The trained find jobs.

But: If the jobs are not there, benefit spending does not fall.

End

The deficit widens in the short run but may narrow in the long run.

Can you say this chain from memory?
Members can hide the links, test themselves and track which chains they have mastered.

Discuss whether governments should borrow to fund education and training.
Assess the costs and benefits of interventionist supply-side policies.
Explain why supply-side policies may worsen the budget position in the short run.

No standard diagram.

Cuts to education spending → deficit narrows now, but the tax base grows more slowly.

GCSE version