4.5.3 - Public sector finances

Question 1

What are automatic stabilisers ?

Answer 1

automatic fiscal changes as the economy moves through stages of the business/trade cycle.

government spending and taxation are automatic stabilisers.

• reduce the impact of changes in the economy on national income

Question 2

What is discretionary fiscal policy

Answer 2

a demand-side policy that uses government spending and taxation policy to influence aggregate demand (AD)

Question 3

What is national debt

Answer 3

the accumulation of all previous deficits and government debt

Question 4

What is structural deficits

Answer 4

The structural deficit is the fiscal deficit which occurs when the cyclical deficit is zero; it is long term and not related to the state of the economy.

Question 5

What is cyclical deficits

Answer 5

deficits that occur due to downturns in the business/trade cycle, usually as a result of a recession.

Governments receive less tax revenue as profits and incomes fall – and government spending increases
These deficits tend to self-correct as the economy starts to grow again.

Question 6

Factors influencing size of fiscal deficits

Answer 6

• Trade cycle e.g boom and recession.
• ## Unforeseen events , e.g natural disasters or recession. ⬆️Gov spending on supporting the country.

Question 7

Factors influencing size of national debt

Answer 7

Question 8

What is the significance of the Size of Deficits & National Debts

Answer 8

• Reduced credit rating for gov = Lenders may demand higher interest repayments.
• gov have to spend large amount of money to repaying their national debt, which has a high opportunity cost as it could be used for other things.
• gov increase expenditure = increase in AD = inflation
• Inter-generational equity: today’s borrowing has to be paid back from tax revenue received from future generations. The greater the debt, the greater the burden on the next generation of tax payers.