Fiscal Policy Flashcards
The budget framework
budget explains details of fiscal policy and reports on public finances
Annually presented to parliament by the chancellor
Then debated and passed into law
Total managed expenditure
And what its split into
Total spending by the public sector
Split into departmental expenditure limits and annually managed expenditure
What is DELs
Multi year limits on departmental spending
Most is on NHS and transport
Should be fixed but are usually subsequently revised
What are AME’s
Reviewed annually in budget on welfare spending and state pensions for example
What is DEL split into and why
Capital ( investment projects)and current (day to day )
Done to protect capital spending
Spending review
Treasury lead allocation of resources according to gov priorities
How often is spending review
2/3 years
Why is spending review good
Gives certainty to departments on future financing and allows them to look long term with money
OBR created and feature
2010 independent - this is an attempt to improve credibility of fiscal policy
What does obr do
Provides forecasts of fiscal policy that project whether policy has greater than a 50% chance of meeting target
4 obr aims
Evaluate fiscal risk
Judges performance against targets
Assesses long term sustainability of finances
Scrutinises welfare and cost of taxes
Why obr created
As politicians prone to overly positive fiscal forecasts that allowed excessive accumulation of debt
Fiscal rules
PSND must be falling as a percentage of gdp by 5th year of rolling forecast
PSNB must not exceed 3% of gdp
Welfare cap must not be exceeded
Why do we borrow
Inter generational fairness
Funding of public sector
Gradual tax rate adjustment/smoothing
Output stabilisation
What can treasury do to fiscal rules
Suspend rules in the event of -ve economic shock
Positives of fiscal rules
Allows gov not to make unpopular decisions on welfare spending
Forces gov to borrow for good reasons and not to buy votes
Doesn’t allow gov to inflate debt away
5 year rolling forecast period prevents the inappropriate sale of assets in order to reach target
Temp suspensions can increase flexibility
3 percent borrowing limit, limits crowding out effect
Keeps current spending by current revenues
-vets of fiscal rules
Suspensions can means gov don’t take meeting target seriously as they can suspend a lot due to frequent -be shocks
Real interest rates -be so borrowing should be encouraged not limited
Obr has no say in suspensions
Borrowing rule fails to exempt borrowing for investment - as boring is needed for large investment like HS2
Rolling forecast means deadline never comes so public finances can slowly deteriorate
B of e holds 33% of gov debt that isn’t included in debt - presents distorted picture of how much debt country is in
When have there been spikes in gov spending
Covid and world wars
Where was spending after world wars
Around 40 %
who does uk Spend more than and less thab
Why
Spends more than us
Less that Nordic countries - priorities welfare and standard of living
How much centralisation does uk have with gov spending
High degree
Who has low degree of centralisation and why is it good
Switzerland - good bc areas compete with each other and thus allocation of resources is more efficient
Where does gov spend most money
Health and social care
Where does gov spend less money relatively
Defence
