4- Public sector finances

Question 1

Automatic stabilisers

Answer 1

Automatic stabilisers are mechanisms which reduce the impact of changes in the economy on national income.

Question 2

Examples of automatic stabilisers

Answer 2

Taxation and government spending

Question 3

Impact of automatic stabilisers

Answer 3

Automatic stabilisers cannot prevent fluctuations; they simply reduce the
size of these problem and there can be negative aspects to these stabilisers.

Question 4

Discretionary fiscal policy

Answer 4

Discretionary fiscal policy is the deliberate manipulation of government
expenditure and taxes to influence the economy; expansionary and deflationary policies.

Question 5

Difference between fiscal debt and national debt

Answer 5

The national debt is the sum of all government debts built up over many years whilst a fiscal deficit is when the government spends more than it receives that year.

Question 6

Cyclical deficit

Answer 6

A cyclical deficit is the part of the deficit that occurs because government spending and tax fluctuates around the trade cycle. When the economy is in recession, tax revenues are low and spending is high creating a larger deficit.

Question 7

The structural deficit

Answer 7

The structural deficit is the fiscal deficit which occurs when the
cyclical deficit is zero; it is long term and not related to the state of the economy.

Question 8

Annual deficit

Answer 8

Structural deficit + cyclical deficit

Question 9

Factors which influence the size of the fiscal deficit

Answer 9

• Trade cycle- more gov spending, less tax revenues
• Unforeseen events- recessions, natural disasters
• Interest rates- if interest rates on government debt increase, the amount the government pays in interest repayments increases and this is likely to increase the deficit.
• Gov aims- austerity decreases the deficit and big AD increases worsens the deficit
• Nationalisation or privatisation

Question 10

Factor which influence the size of the national debt

Answer 10

• Continuous fiscal deficits

- Ageing population- structural deficit- less tax revenues from work

Question 11

Significance of deficits on interest rates

Answer 11

• High borrowing will increase the price of money and increase the interest rate and cause crowding out.
• High debt- riskier gov borrowing- increased interest
• BUT: government could borrow from overseas which would not have an effect on the interest rate.
• BUT: doesn’t really depend on debt but economic and political climate and whether gov have ever defaulted on debts before.

Question 12

Significance of deficits on inequality

Answer 12

• If deficit is due to current expenditure- future generations may not benefit and may have to repay deficit with future tax rises or austerity.
  If deficit is due to capital expenditure- future generation may gain benefits with better infrastructure.
• Due to inflation the value of the debt erodes away- so may not burden future generations.

Question 13

Significance of deficits on inflation

Answer 13

• If public sector spending is greater than private sector spending- it may lead to a rise in AD- inflation.
• If gov can’t borrow money, they will print more money- hyperinflation
  BUT: Depends how much money is printed and where the economy is producing on the LRAS.

Question 14

Significance of deficits on foreign currency

Answer 14

If a government has borrowed from abroad, it may have difficulties getting enough foreign currency to make repayments on its debt. This could also cause problems for consumers as if there is not enough foreign currency, they will be unable to import goods.

Question 15

Crowding out

Answer 15

When government spending fails to increase overall aggregate demand because higher government spending causes an equivalent fall in private sector spending and investment.