IB Econ HL 3.3.8 Sustainable government debt

[Maximum number: 4]

Economists agree that travel by train, instead of by plane or car, should be promoted in Europe because of environmental issues. However, the growth of passenger rail travel in Spain has slowed down. During 2013, millions of passenger-kilometres* travelled on railways in Spain increased by 6.72 %, while in 2019 the annual increase only amounted to 1.36 %.
* passenger-kilometres measure the distance travelled by all passengers over one year

Figure 4 illustrates the monopoly-market structure for tickets on a train between Madrid and Barcelona in Spain. MC is marginal cost, AC is average cost, D is the demand for tickets and M R is marginal revenue.

Figure 4

Figure 5 is a demand and supply diagram that illustrates the effect if the government of Spain provides a per-unit subsidy for train tickets. D is demand, $S_{1}$ is the original supply. $S_{2}$ is supply after the subsidy has been provided.

Figure 5

The European Investment Bank has been promoting sustainable investment in the rail sector. Electrification of railways and the use of new technologies are better for the environment than systems that use diesel trains. Such government investment causes additional growth in the economy's output through the Keynesian multiplier effect.

Assume that Spanish consumers spend EUR 0.75 on domestic goods and services out of every additional EUR 1.00 of income.

Government investment in railways is constrained by Spain's level of government debt, as shown in Table 2. Despite a planned reduction in the budget deficit, International Monetary Fund (IMF) projections up to 2027 estimate that general government debt as a percentage of GDP will remain at over 110 %, which may not be sustainable.

Table 2: General government finance statistics for Spain

With two references to the data provided in Table 2, explain the difference between a budget deficit and government debt.

To reduce the possible risk from unsustainable government debt, policies could be chosen that do not require large increases in government expenditure. For example, regulations could require that any abnormal profits earned by a railway firm must be directed to investments in upgrading the railway sector.

Alternatively, the government could promote consumer nudges to influence how people choose to travel.

Level

Marks

0

The work does not meet a standard described by the descriptors
below.

1

The written response is limited.

1-2

For a correct explanation of a budget deficit OR a correct explanation of government debt [1] with at least one reference to (example from) the data [1].

Budget deficit: Is (a flow) when government expenditure/spending exceeds government (tax) revenue (usually over a period of a year).

Government debt: The sum/accumulation (stock) of all past budget deficits minus any budget surpluses OR the total amount the government owes to (domestic and foreign) creditors.

Data examples:

- In 2020 there was a budget deficit of €111 billion, which was equal (in absolute terms) to expenditure less revenue.

- In 2021 the government debt increased to €1736 billion from its 2020 level due to the budget deficit of €79 billion.

- Even though there is still a deficit, the government debt to GDP ratio has fallen to 112.8\%, because GDP has increased.

- Reference to any relevant data should be rewarded.

2

The written response is accurate.

3-4

For a correct explanation of a budget deficit AND a correct explanation of government debt [2] with two references to
(examples from) the data $[\mathbf{1}+\mathbf{1}]$ .

IB Economics HL 3.3.8 Hl Sustainable Government Debt Questions

Exam points

IB Economics HL 3.3.8 Hl Sustainable Government Debt Questions question 1