fiscal policy Flashcards
what is fiscal policy
involves the use of government spending, direct and indirect taxation and government borrowing to affect the level of growth of aggregate demand, output and employment
what are the four primary economic objectives
- stable prices - 2% inflation
- full employment
- economic growth
- balance of payments
what is a budget deficit, how can it be mended, and what happens if it is not
when goverment spending is greater than taxation revenues collected within a tax year
the difference is financed through government borrowing
a budget surplus can pay off this debt the following tax year
if it does not, then the debt will become a part of national debt, which will rise or fall with each budget deficit or surplus
what is a cyclical budget deficit
happens when the economy is in a recession and unemployment is high, leading to less tax revenue and more government spending
what is a structural budget deficit
when there is still a budget deficit remaining after the course of one whole economic cycle
what are the two types of government budget deficits and how are they caused
discretionary budget deficits are created due to deliberate government policy. for example, keynsian economicsts believe in increasing governemnt spending during a recession
automatic budget deficits are created due to changes in the economic cycle, without any deliberate government action being taken. less tax revenue is collected during a recession due to higher unemployment and more welfare payments
disadvantages of a budget deficit and national debt
high intrest payments lead to oppertunity cost as they could’ve been spend elsewhere
debt must be borrowed, leading to a risk of a credit downgrade and possibly higher interest payments
loss of confidence in the government making it harder to refinance existing debt
slower economic growth due to less investment
solutions to a budget deficit
increasing tax revenues/reducing government spending
however debt may not be a bad thing if it is invested into infrastructure or education which will inturn grow the economy helping to repay debt back in the future
it may not be appropriate to try and reduce budget deficits during an economic downturn as this may further reduce AD leading to more unemployment and possibly deflation
