The finance ministry of Norvale has published the following record after introducing a temporary repair programme for its rail network. The programme employ...

(a) The budget is balanced in 2023. [1] The balance is 0% of national income, meaning government revenue equals government expenditure. [1]

(b) Two explained reasons are required. Lower export sales reduce firms' profits, so corporation-tax revenue falls. [2] Lower production and sales can also reduce indirect-tax receipts. [1] In addition, firms may dismiss workers, reducing income-tax payments, while higher unemployment increases benefit spending. [1] Any two developed chains gain full credit. [4]

(c) Expansionary fiscal policy involves increased government expenditure and/or reduced taxation. [1] Its purpose is to raise aggregate demand, economic growth or employment. [1]

(d) Continuing the programme could raise aggregate demand because rail spending is a government injection. [1] Contractors employ labour, raising household incomes and consumption in other markets through the multiplier process. [2] Better rail infrastructure may lower transport costs, raise productive capacity and improve reliability for exports or tourism. [2] Stronger growth can then increase tax revenue and reduce benefit payments. [1]

However, continued spending increases an existing deficit and public debt. [1] Higher borrowing may mean higher interest payments or future taxes, and can crowd out private investment if interest rates rise. [2] Resources may be diverted from more productive uses; if capacity is already tight, extra demand may cause inflation rather than output growth. [2]

Judgement: Continuation is more convincing if Norvale has unused labour and the rail repairs have a high long-run return. If borrowing costs are high and the economy has limited spare capacity, a smaller, delayed or better-targeted programme may be preferable. This supported evaluation is needed for the final marks. [2]