4.5.3 Public sector finances Flashcards
What are automatic stabilisers?
Mechanisms which reduce the impact of changes in the
economy on national income.
They do not prevent fluctuations - they just reduce the impact.
Examples of automatic stabilisers?
Government spending - In recession benefits increase as more people are unemployed and so the overall impact on AD is reduced.
Taxation - During a boom, tax increases as more people have jobs and higher incomes, this reduces disposable income -> decreasing AD and preventing demand pull inflation.
What is discretionary fiscal policy?
The deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary policies.
National debt vs fiscal deficit?
The national debt is the sum of all government debts built up over many years whilst
A fiscal deficit is when the government spends more than it receives that year.
What is a cyclical deficit?
A cyclical deficit is the part of the deficit that occurs because government spending and tax fluctuates 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?
A structural deficit occurs when a government’s spending exceeds its revenue even when the economy is at full potential, due to long-term budget imbalances.
Usually worse for an economy because it is likely that national debt will grow over time as the government has to consistently borrow money to finance spending
What are the factors influencing the size of fiscal deficits?
- Trade cycle
- Unforeseen events, such as natural disasters
- interest rates (on government debt)
- Privatisation (provides one off payments to the government)
- Government aims
What are the factors influencing the size of national debt?
- Ageing populations.
- If the government is continuously running a deficit.
