4.5.3: Public Sector Finances

Question 1

What is Public Sector Net Borrowing (PSNB)?

Answer 1

Budget deficit/fiscal deficit.

Question 2

What is Public Sector Net Debt (PSND)?

Answer 2

National debt.

Question 3

What are features of automatic stabilisers?

Answer 3

-Policies which offset fluctuations in the economy (e.g. benefits during recession).
-These include transfer payments & taxes.
-Triggered without government intervention.

Question 4

What are features of discretionary fiscal policy?

Answer 4

-Deliberate manipulation of government expenditure & taxes to influence AD.
-Can be expansionary or deflationary.

Question 5

What is the difference between fiscal deficit & national debt?

Answer 5

Fiscal Deficit: when expenditure exceeds tax receipts in a financial year.
National Debt: the amount of money the government has borrowed over a period of time.

Question 6

What is the UK’s:
-Fiscal deficit?
-National debt?

Answer 6

-£1.8trn (88% of GDP).
-£48bn (23% of GDP).

Question 7

What is the difference between cyclical deficit & structural deficit?

Answer 7

Cyclical Deficit: a temporary deficit that occurs as government spending & taxation fluctuates around the business cycle.
Structural Deficit: a deficit which is due to an imbalance in government revenue & expenditure levels (exists at every point in the business cycle).

Question 8

What are factors influencing the size of fiscal deficits?

Answer 8

-Trade Cycle: in a recession, tax revenue decreases and spending increases, increasing the fiscal deficit.
-External Shocks: natural disasters, war & recessions increase spending.

Question 9

What are the factors that influence the size of national debt?

Answer 9

-If the government is continuously running a deficit over 3%, then national debt will increase overtime.
-When the government runs a budget surplus, the size of the national debt decreases.
-Ageing populations tend to contribute to a high national debt since the government runs a structural deficit in order to fund pensions, leading to a high national debt.

Question 10

What is the significance of fiscal deficit & national debt?

Answer 10

-The cost of borrowing could increase, since borrowing money increases demand for credit in the economy.
-If confidence is lost in the government’s ability to repay the debt, governments might have to raise interest rates to encourage investors to buy bonds, so that they can finance the debt.
-It could lead to higher taxes and austerity measures, especially if the debt becomes uncontrollable.