British Fiscal Policy Flashcards
Week 4
1
Q
What are economic functions of government?
A
- Providing public goods given inefficiency of the market
- Redistributing income and wealth in society
- Smoothing/addressing cyclical fluctuations
2
Q
What is a Government Budget?
A
- Annual statement of projected spending and receipts during the year
- Conditioned to previous spending and in international context
3
Q
What are Government transfers?
A
- Largely dedicated part of the budget for redistribution
- If spending > income: DEFICIT
- If spending < income: SURPLUS
- If spending = income: BALANCE
4
Q
Explain the UK’s current fiscal framework using labour’s 1997 as an example
A
- FRAMEWORK; Settings for fiscal policy by the Chancellor
- Fiscal rules/targets tell what they are hoping to achieve over the year and underpin taxation and spending
- EXAMPLE: NEW LABOUR 1997
- 2 Key objectives; share burden of taxes for future and current tax payers AND keep public sustainable
- Labour Govt. adopted a golden rule [ONLY borrow for investment] and substainable investment rule (debt <40%) within the 1998 CFS
- The Code for Fiscal Stability required required Government to forecast plans, BUT there was no penalty for not doing so
5
Q
What are the Current Fiscal rules?
A
- Debt should be on course to fall as a share of national income in five years’ time
- Public sector borrowing should not exceed 3% of GDP in the five years’ time
- Some types of welfare spending must remain below a pre-specified cap
- Explicit facts about debt-servicing
- Rules may be temporarily suspended in the event of a “significant negative shock”
6
Q
What is fiscal policy? What are the two types of fiscal policy (GOVT LED)
A
- Fiscal policy is the use of Government budget to achieve key macroeconomic growth
- AUTOMATIC; Triggered by the state (No Govt. actions)
- DISCRETIONARY; Policy initiated by the Government
7
Q
What is the difference between contractionary and expansionary fiscal policy?
A
- CONTRACTIONARY: lower G and higher T
- EXPANSIONARY: higher G and lower T
8
Q
What is the effect of fiscal policy on output and employment stabilisation?
A
- When demand fall, GDP will also fall and unemployment
- π falls until you get to π *
- Depends on how long π ->π *
- Some suggested countercyclical fiscal policy, like in the 2008 GFC, the VAT rate was cut from 17.5% to 15%
9
Q
What are a Government’s options in response to a fall in demand?
A
- LAISSEZ-FAIRE: There will be an output gap, as unemployment rises and wages falls in theory
- Movement down the LRAS curve and firms higher more workers- ‘sticky wages’ might occur in reality
- FISCAL POLICY: Use expansionary fiscal policy aims to offset exogenous negative shocks to demand
10
Q
What are some issues with fiscal stimulus?
A
- Time lags: Hampered by 3 potential lags
- Recognition lag: Time it takes to figure actions is needed
- Law-making lag: Time taken for Parliament to pass law
- Impact lag: Time taken for action to have an impact
11
Q
What are automatic stabilisers?
A
- Automatic Stabilisers: Making booms/busts less impactful by decrease/increase spending
- Entering a recession increases the unemployment within an economy
- G rises and T falls
- Issues as G>T, deficit increases so they must borrow
12
Q
What is the difference between Structural Vs Cyclical Budget balances?
A
- STRUCTURAL: Budget occurring at full employment given particular economic stance [RGDP = Potential]
- CYCLICAL: Actual budget minus the structural budget balance, broken down as the state of the economy [RGDP =/= Potential]
- The MAIN reason for GFC, COVID, WSC
13
Q
What is fiscal stance? Graphically, what does fiscal stance look like?
A
- Fiscal stance: Choices that a Government make in order to achieve a target
- Fiscal stance at different cyclical stages have different outcomes
- Positive linear slope of FP due to automatic stabilisers
- There is a line (|) where anything to the left is -ve and anything right is +ve output gap
- There is a line (_) where anything above is a surplus and anything below is a deficit
14
Q
Explain the graph of Fiscal stance
A
- You start at point A, where there is no output gap and there is a surplus
- This has a deflationary effect, where T>G
- If there is no policy and growth is harmed, this will lead to a point where there is a budget deficit and a negative output gap
- Therefore, the Government would increase spending,
- If this fails, the budget deficit would widen
- If this succeeds, the budget deficit would reduce, maybe even giving a +ve output gap
15
Q
What is Government debt? What is the formula?
A
- Total amount of money borrowed by the Government
- Budget deficit increases debt, whilst budget surplus decreases debt
- Formula = (sum of past deficits) + (sum of past surplus) - asset sales
