When the GDP growth rate slows, what is the most likely impact on a government's budget deficit, assuming other factors remain constant?

• A. The budget deficit tends to decrease because government spending automatically falls.
• B. The budget deficit is eliminated because slower growth leads to higher tax rates.
• C. The budget deficit remains unchanged as GDP growth does not affect government finances.
• D. The budget deficit tends to increase due to lower tax revenues and higher government spending on social programs.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the relationship between GDP growth and government budget components. When GDP growth slows, economic activity decreases, which typically reduces tax revenues because individuals and businesses earn less income and profits.
2. Step 2: Recognize that government spending often includes automatic stabilizers, such as unemployment benefits and other social programs, which tend to increase when the economy slows down and more people require assistance.
3. Step 3: Combine these effects to analyze the budget deficit. Lower tax revenues mean the government collects less money, while higher spending on social programs means the government spends more.
4. Step 4: Conclude that with lower revenues and higher expenditures, the budget deficit is likely to increase, assuming no changes in tax rates or discretionary spending.
5. Step 5: Summarize that the most likely impact of a slowdown in GDP growth on the government budget deficit is an increase in the deficit due to these automatic fiscal responses.