4.5.3 Public Sector Finances

Question 1

Discretionary fiscal policy?

Answer 1

• Fiscal policy implemented at discretion of policy makers

Question 2

Automatic stabilisers?

Answer 2

• Feature of tax and transfer system that reduces economic activity during booms and stimulates activity during recessions without direct intervention by government

e.g. unemployment benefits received by workers who got laid off due to recession

Question 3

National debt?

Answer 3

• Government’s total accumulated borrowing - what they still owe

Question 4

Debt-to-GDP ratio?

Answer 4

• Total government debt as a ratio of GDP

Used to judge likelihood of government debt being repayed, higher the ratio = repayment less likely

Question 5

Cyclical budget deficit

Answer 5

• Part of deficit that occurs due to automatic stabilisers

Question 6

Structural budget deficit?

Answer 6

• Part of deficit that occurs due to discretionary fiscal policy rather than automatic stabilisers e.g. changes to income tax rates

Question 7

Factors influencing the size of the budget deficit?

Answer 7

• State of the economy: economic growth strong = wages, empoyment, profit likely to be ↑ = government earning ↑ tax revenue + ↓ spending on unemployment benefits = decreased budget deficit
• Age distribution of the population: dependency ratio, ageing population = ↓ income tax revenue = ↑ spending on state pensions/health services = increased budget deficit
• Discretionary fiscal policy
• Debt interest: larger debt = larger interest payments on debt

Question 8

Factors influencing the size of the National Debt?

Answer 8

• If gov has fiscal surplus = smaller national debt
• If gov has fiscal deficit = larger national debt

Question 9

How do fiscal deficits and national debt affect interest rates?

Answer 9

• When the government runs a budget deficit = needs to borrow more = ↑ demand for money = ↑ IR

Question 10

How do fiscal deficits and national debt affect debt servicing?

Answer 10

• ↑ national debt = ↑ debt repayment = debt servicing becomes harder
• ↑ IR = interest payments ↑ = debt servicing becomes harder

Question 11

How do fiscal deficits and national debt affect intergenerational equity?

Answer 11

• ↑ national debt through budget deficits = future generations have to pay for it through higher taxes/reduced gov. spending

If economic growth ↑, debt-to-GDP ratio may ↓ = country more credit-worthy

Question 12

How do fiscal deficits and national debt affect inflation?

Answer 12

• Budget deficit = ↑ borrowing = gov spends more and private sector spends less = AD and inflation remains same
• OR could = ↑ supply of money (printing) = ↑AD (demand-pull inflation)

Question 13

How do fiscal deficits and national debt affect credit ratings?

Answer 13

• ↑ national debt = likely ↑ in debt-to-GDP ratio = less credit-worthy = ↓ debt sustainability