4.2.5.1 - Fiscal Balance

Question 1

What is the level of deficit

Answer 1

The difference between total expenditure and total revenue at any one time. A deficit occurs when expenditure > revenue

Question 2

What is the government debt

Answer 2

The accumulation of the government deficit overtime, it is the total amount that the government owes to the foreign financial institutions, banks, individuals etc..

Question 3

How is debt reduced

Answer 3

If the gov is continuously running a deficit, the size of the debt increases
The only way to reduce the total debt is to run a surplus which will enable the gov to begin to pay off their debt.

Question 4

What are factors that affect the deficit

Answer 4

• when in a recession, the size of the budget deficit if likely to increase
• is interest payments are high, bond yields will be high so the deficit will increase
• shocks to the demand or supply size usually occur the gov to intervene so spending will increase, increasing te size of the deficit

Question 5

What are the causes of the current uk budget deficit ( June 2023)

Answer 5

• high spending on support schemes for the cost of living
• rising interest rates
• a weaker economy

Question 6

What is a cyclical deficit

Answer 6

• a temporary deficit which is related to the business cycle
• a deficit may occur during recessions, when governments increase spending to stimulate the growth of the economy

Question 7

What is a structural deficit

Answer 7

• a deficit which is due to imbalance in the revenue expenditure of the government
• it exists at every point in the business cycle
  ( a structural surplus could occur instead, but there will always be either a surplus, balance, or deficit at any given point)

Question 8

What are the consequences of a budget deficit

Answer 8

• a fiscal deficit could be inflationary if it increases AD
• more gov spending could lead to crowding out of the private sector, leaving fewer funds in the private sector for firms to use
• could lead to increased interest rates, the gov has to offer investors an attractive rate in order for them to buy the debt

Question 9

Why the gov should aim to run a balanced budget

Answer 9

• a reduction of interest payments will avoid death traps
• high debt threatens confidence, stability and recovery which could be avoided
• credibility in financial markets is increased
• avoids higher future taxes, so is equitable for future generations

Question 10

What is the crowding out effect

Answer 10

The gov invests not the economy which discourages investment by the private sector as there is no incentive to borrow
The gov must borrow to fund the deficit making it even more expensive for the private sector to borrow
Due to interest rates being pushed up by the gov deficit
The supply of bonds will fall as gov is selling them to investors in order to pay off the current deficit (for bonds to be attractive to investors, interest rates must rise)

Question 11

Why the gov should maintain a deficit

Answer 11

• low interest rates could encourage investments and increase consumption
• sustainable economic growth could begin to occur is the gov invests in the long term
• the supply side of the economy improves as firms ware able to improve their f.o.p

Question 12

What fiscal policies could be used to reduce a budget deficit

Answer 12

• increase income tax to increase gov revenue
• decrease sending on Jobseeker’s Allowance which could encourage more people to return to work
  (Contractionary policies)

Question 13

What is the office for budget responsibility

Answer 13

Provides an independent and authoritative analysis of the uk’s public finance - it has 5 key roles:
- economic and fiscal forecasting
- evaluating performance against targets
- sustainability and balance sheet analysis
- evaluation of fiscal risk
- scrutinising tax and welfare costing policy.