Budget Analysis Flashcards
What are discretionary spending and mandatory spending? Compare those two and provide examples.
Discretionary spending is optional spending mostly used for defense, optional programs. The government has control over it. Mandatory spending (or entitlement spending) is required by law, the government has no control over it (Sodra money, medicare, pensions). The main difference between the spendings is the control of government.
Do we really have control over our budget?
No, since the percentage of most of spending is mandatory spending, we do not have control over it. We are obliged to pay people the money they own from the government.
What kind of countries tend to have higher budget deficits? Why this helps them?
Richer countries tend to have higher budget deficits because they engage in more deficit spending, which helps them in the long run with upcoming crises.
Which countries can borrow more?
Richer, since their credit history is better.
What kind of countries tend to have higher social mandatory spending?
Richer, as you get richer and older mandatory spending tends to grow.
Why is it difficult to compare the budgets of different countries? What budgeting US uses? Why?
One country may use capital budgeting, the other may use current budgeting. US uses current accounting. It does not use capital accounting since it can be abused.
What is capital budgeting? Explain by providing example.
Can be used when we want to reduce budget deficit or make it look smaller. For example, if the government is considering building the bridge, they can spread the costspan and do not account for during its lifeall the costs in year 1 (because the bridge gives benefits throughout the years).
What are the problems in capital budgeting?
We cannot know the exact depreciation and amortization schedule. We cannot also determine what is investment spending at what is not.
What problems are when using current budget? Explain by providing an example.
In 90s there were a lot of cell phone sales, so those sales made the budget surplus but actually, you cannot account those as income, since you only change asset’s liquidity (from cash to asset).
What example can be provided with Greece and budget accounting?
Greece wanted to join EU, therefore had to reduce its budget deficit to meet Maastricht criteria (3%). So, it has started selling its inneficient state railway shares to the government which made the budget deficit smaller.
How many countries/states/cities try to limit their spending by law? Why do this?
Balanced Budget Requirement (BBR). The budget is really important for the macroeconomic health of the country.
What budget deficit is allowed in EU?
3%
What debt to GDP ratio is allowed in EU?
60%
When times are bad is it better to run large budget deficit?
Yes
What is Keynesian theory?
IS-LM macro model. More government spending or tax cuts stimulate the economy in the short-run (should not be done for a long time).
Why should we smooth booms and drops in the economic cycle?
When you have high levels of the economic booms, you might overheat the economy, high levels of inflation. When you have high levels of drops, you have high levels of unemployment.
Why overcompensation appears?
Let’s say that we are in the recession, and it takes time for the government to meet, to approve the budget and when that is done, we are already at the boom, which makes overcompensation - due to time lags.
What is automatic stabilization? Provide examples. Where this policy shows great results?
Policies that automatically reduce tax collections or increase government spending if there is a recession (progressive income tax, corporate tax, unemployment benefits). In EU this turned out as a great policy.
What is discretionary stabilization?
Direct policy actions taken by the government in response to business cycle (fiscal stimulu cheks in US, unemployment insurance extensions).
What is short-run stabilization?
The idea to smoothen business cycle peaks and downs.
What kind of policy is better for “V” shaped recession? Why?
Automatic stabilizers because recession is short.
What kind of policy is better for “U” shaped recession? Why?
Discretionary stabilization by issuing stimulus cheks, getting something that kicks the economy growing again.
What is a liquidity trap?
Situation when interest rates are nearly zero, it is better for people to hold money in cash.
What policy should be used in case of liquidity trap?
Fiscal policy - we need to increase GDP and spread out the IS curve.
If consumer spending decreased, what policy can be implemented? Why automatic stabilizers would not work in this case?
You should use discretionary stabilization like stimulus checks. Automatic stabilizers won’t work since people are losing their jobs, therefore no taxes are being paid.
What group of people was least spending during covid? What the most?
Poor - the most, rich - the least.
