4.5.3 Public sector finances Flashcards
What are Automatic stabilisers
Relate this to a recession
- mechanisms that reduce the impact of changes in the economy on national income
- government spending and taxation are automatic stabilisers
- In a recession, benefits increase as more people are unemployed - reducing the size in fall of AD
- And people may move into a lower tax band meaning they aren’t paying as much tax
How would Automatic stabilisers work in a boom
tax increases as people have more jobs and higher incomes
and this tax reduces disposable income so decreases consumption and AD
meaning that demand doesn’t grow too high
True or false:
Automatic stabilisers can prevent fluctuations
False
they simply reduce the size of these problems
What can be a drawback of automatic stabilisers
Benefits may act as a disincentive to work and lead to higher unemployment
whilst high levels of tax can decrease the incentive to work hard.
What is Discretionary fiscal policy
is the deliberate manipulation of government expenditure and taxes to influence the economy
expansionary and deflationary policies
What is national debt
What is fiscal deficit
is the sum of all government debts built up over many years
fiscal deficit is when the government spends more than it receives that year
What is Public-Sector Net Cash requirement
is the total amount of money that the Government needs to borrow in order to fulfil its spending plans
the difference between spending and revenue
What is a cyclical deficit
is the part of the deficit that occurs because government spending and tax fluctuate around the trade cycle
When the economy is in recession, tax revenues are low and spending is high creating a larger deficit
What is a structural deficit
At the peak of the boom, there is no cyclical deficit
any deficit at this point is a structural deficit
The structural deficit is the fiscal deficit that occurs when the cyclical deficit is zero; it is long term and not related to the state of the economy
What is the consequence of a structural deficit
it is argued that structural deficits need to be eliminated, why is this difficult
it is likely that national debt will grow over time, as the government has to consistently borrow money to finance spending
difficult since it is impossible to know what part of the deficit is structural and what part of it is cyclical,
What are the factors influencing the size of fiscal deficits
- trade cycle - causing a cyclic deficit (government tax revenue decreases whilst government spending increases)
- Unforeseen events - such as natural disasters or recessions
- Interest rates - If interest rates on government debt increase, interest repayments increases and this is likely to increase the deficit
- privatisation - provide one-off payments to the government which will decrease the deficit in the short term
- Government aims - since 2010 it has been austerity
- Revenues from oil contribute to Gov spending - reducing deficits
What factors influencing the size of national debts
- continuously running a deficit, then the national debt will increase over time - structural deficit
- Ageing populations tend to contribute to a high national debt since the government runs a structural deficit in order to fund their pensions and health care
What is the significance of fiscal deficits and national debts
- High levels of borrowing may raise interest rates, causing crowding out (this is not the cause if the Gov borrows overseas)
- Countries have to spend a large amount of money on servicing their national debt through interest repayments, which has a high opportunity cost (however there have been low interest rates for quite a while)
- high fiscal deficits and national debts benefit citizens today at the expense of future generations and can cause intergenerational inequality e.g. ratio or current to capital spending
- Inflationary pressures of Gov spending
- Poor credit rating can lead to high interest rates for the Government
