Test A – Question 11

The economic slowdown caused a decrease in government tax revenues, and consequently an increase in the domestic national debt.

1. What is internal national debt?
2. Using a complete diagram of the government budget, show the effect of the decline in tax revenue on the increase in the domestic national debt.

answer:

Section A :

The “domestic national debt” is a figure that summarizes the state’s debt to the public in shekels (all debts that the state has borrowed from the public and has not yet repaid). Most of the debt was created through the issuance of bonds to the public, and some of the debt was created as a result of loans that the state received directly from banks and pension funds.

Section B :

When government revenue from taxes is small and government expenditures remain unchanged, then the government needs to find alternative financial sources (instead of taxes) to finance the expenditures.

In this situation, the government can, for example, increase the domestic loans it borrows. Increasing domestic loans will increase the domestic national debt.

Let’s assume, for example, that in the initial situation, the country’s total internal debt was 100 million NIS and in a certain year, taxes decreased by 10 million NIS.

In order to finance its expenses, the government decides to increase the amount of domestic loans it takes out by 10 million NIS, and therefore the country’s internal debt also increases by 10 million NIS.

Example of the government budget in millions of NIS (changes are marked with arrows):

Please note: Since the amount of loans the state took out is the same as the decrease in the amount of taxes, the total revenue side remains unchanged (270 million NIS).