4.5.3 Public Sector Finances Flashcards
1
Q
What does the public sector include?
A
- central government
- local council
- public corporations (network rail)
- nationalised industries
2
Q
What is discretionary fiscal policy?
A
- when a govt chooses to change govt spending is+ taxation = deliberate act/ choice
- either expansionary or contractionary
3
Q
What is expansionary fiscal policy?
A
- used delivered to increase AD by increasing govt spending + or lowering taxation
- sometimes called a fiscal stimulus in the case of policies to help the economy recover from financial crisis + Covid
4
Q
What is contractionary fiscal policy?
A
- when fiscal policy is used to reduce AD by reducing govt spending and/or increasing taxation
- sometimes called austerity in the case of policies after the stimulation to the economy for the recovery following the financial crisis
5
Q
What are automatic stabilisers?
A
- occur naturally as govt spending + taxation respond to changes in the level of GDP
- they act to stabilise movements from cyclical swings
6
Q
Examples of automatic stabilisers
A
- e.g. in a boom a progressive income tax structure takes a greater proportion of income therefore stabilising the boom
- this way they reduce the magnitude of destabilising effects
- can also act to reduce the size of the multiplier as an increase in a leakage (withdrawal) is likely to occur following an increase in income e.g. savings, imports etc
7
Q
What is fiscal drag?
A
- an automatic stabiliser
- e.g. if the personal allowance (£12,570) is not increased then more people will be ‘dragged’ into paying income tax as wages increase
- more incomes may increase above £50,270 so more of their income will be taxed at 40%
8
Q
Benefits of automatic stabilisers for tax?
A
- during phases of high economic growth automatic stabilisers will help to reduce the growth rate + avoid risks of an unsustainable boom
- with higher growth, the govt will receive more tax revenue since people earn more
- higher growth will also mean a fall in unemployment = govt spends less on unemployment and other welfare benefits
9
Q
What is a budget/fiscal deficit?
A
- govt spending exceeds revenue in a financial year (April to March)
- can be measured in absolute terms or as a % of GDP
10
Q
What is the current figure for govt debt?
A
- 2.8 trillion
- 100% of GDP
11
Q
Income from tax revenue figure
A
1
12
Q
Govt spending figure
A
1.2 trillion
13
Q
What does high national debt mean?
A
the UK govt are paying a lot of debt interest
14
Q
What is the OBR?
A
- office of budget responsibility
- provides independent + authorities analysis of the UK’s public finances
- confirms data/predictions made by the govt or treasury = validates the data more + generates more confidence
15
Q
What is a structural budget deficit?
A
- a budget deficit that can only occur if the economy was operating at a sustainable level of growth + employment
- independent on the economic cycle = a deficit that occurs ignoring the effects of the economy
16
Q
What is a cyclical budget deficit?
A
- considers fluctuations in tax + govt spending due to changes in the economic cycle
- e.g. a larger fiscal deficit is expected in a recession + a movement towards a budget surplus in a boom
17
Q
What budget deficit is present in a recession
A
- spending increases as govt have to psu more benefits, may also choose to increase AD
- recession tax revenue will go down as there is less consumer spending, more unemployment + firms are making less profit
- the combined effect is a cyclical budget deficit
18
Q
What influences the size of a fiscal deficit?
A
- will be higher when the govt spends more, or tax revenue is reduced
- e.g. external shocks (Covid)
- recession
- ageing and/or increasing population
- political ideology for increased govt spending e.g. manifesto for public services
- multinational companies avoid tax
- nationalisation of industries e.g. rail service
19
Q
What influences the size of national debt?
A
- the national debt is the accumulated fiscal deficits + so the national debt will increase each year by the fiscal deficit
20
Q
Impact of national debt + fiscal deficits?
A
- fiscal deficit implies there has been a fiscal stimulus = increase in govt spending + cut in tax
- this will increase AD
- increasing real GDP via the multiplier
21
Q
What does the impact of a fiscal deficit depend on?
A
- impact depends on size of multiplier, how much spare capacity there is in the economy
- depends what the deficit is being used to finance
- if the investment is on capital spending it will lead to more future economic growth which can increase tax revenue + therefore the fiscal deficit will reduce
22
Q
Evaluation for impact of fiscal deficit?
A
- govt has to pay debt interest (£116 bn) on the national debt = opportunity cost
- may lead to tax increases in the future which is a burden for future generation
- may lead to reduce govt spending in the future e.g. austerity
- this may means a reduction in public services e.g. welfare services, pay freezes for public sector works, a decline in provision of education + health = long run affect on LRAS + competitiveness
- high national debt as a proportion of GDP May lead to a fall in credit rating = increase in the rate of interest the govt pays on international loans = could lead to crowding out of private sector investment
23
Q
Impact of an increase in taxation after a fiscal deficit?
A
- could lead to disincentives to work if income tax increases
- disincentives to invest if corporation tax = impact on growth
- increase in VAT, excise duties = increase costs of production
24
Q
Impact of high national debt on bonds?
A
- may lead to a fall in confidence in the bonds
- this may lead to investors selling bonds
- pushes down the price of the bond + increase the (interest rate) yield
- an upward pressure on interest rates could lead to crowding out of private sector investment = reduces AD following the increase from the fiscal stimulus
