Fiscal Policy Flashcards
Fiscal policy
Refers to the decisions by the national government
regarding the nature, level and composition of government expenditure, taxation and
borrowing aimed at pursuing particular goals.
Active element
Deliberate steps implemented to do something. e.g.-increase/decrease budget deficit.
Passive element
Deliberate decision to do nothing or to refrain from doing something. e.g.- No tax increase announced or a particular budget.
Aspects of the South African Public Finance Management Act
Credible view about economy’s future generation of resources
Knowledge about the effects of governments’ use of such resources on the welfare and behaviour of private agents
Prioritisation in budget processes
Anti-cyclical fiscal policy (Keynesian approach)
Managing demand to achieve equality between aggregate demand and aggregate supply at the full employment level of income.
Conventional balance
is equal to the difference between total revenue and total expenditure.
Total revenue components
Total revenue consists of tax and non-tax current revenue (the latter includes entrepreneurial and property income as well as administrative fees and charges), capital transfers (which includes the sale of fixed capital assets) and other receipts (such as recoveries of loans and advances)
What does the Net public sector borrowing requirement (PSBR) consist of?
General government, extra-budgetary
institutions, social security funds, and non-financial public enterprises
Current balance
The difference between total current revenue (tax and non-tax revenue) and total current expenditure (including interest payments)
Primary balance
The difference between total revenue and total
non-interest expenditure.
Recognition lag
The delay between changes in economic activity and the recognition of such changes by policymakers
Decision lag
The time between the recognition of a problem and the decision on how to react
Implementation lag
The period between the taking of a decision and its implementation
Impact lag
Time before an implemented policy measure begins to affect economic behaviour (can take time before the full impact on private expenditure)
Multiplier-dampening crowding out
Multiplier-dampening crowding out of private expenditure (emphasised by monetarists)- the possibility that an expansionary fiscal policy will push up interest rates and in this way crowd out private expenditure
Crowding out
The dampening of private investment on account of increases in interest rates associated with an
increase in public expenditure, especially if the latter is debt-financed
Anticipation of systematic counter-cyclical policies
Ricardian equivalence theorem -> states that it is immaterial whether governments use tax or debt
finance
Political constraints
Deficit bias and asymmetric application of Keynesian measures
Expansionary fiscal policy
Increases in public spending and, at times, tax cuts
Contractionary fiscal policy
Tax increases and spending cuts
Public choice view
The public choice argument that democratic institutions exhibit inherent biases towards an overexpansion of the public sector.
Stagflation
Persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.
FISCAL POLICYMAKING FRAMEWORKS
Consist of institutions that structure fiscal policymaking processes
Numerical and procedural fiscal rules
are quantitative restrictions on the absolute or relative levels of fiscal aggregates.
The most common categories of numerical fiscal rules are:
1. Limits on the extent of the public debt (expressed as amounts or as ratios of the gross domestic product or GDP);
- Limits on various definitions of fiscal balances (expressed as ratios of the GDP);
- Limits on the absolute levels, growth rates or GDP shares of public spending aggregates;
- Upper or lower limits on government revenue (expressed as ratios of GDP)
