Fiscal Policy Flashcards
fiscal policy
any action by the government which affects the size, structure and timing of government revenue and expenditure.
who is responsible for the implementation of government fiscal policy
Minister of Finance, Pascal Donoghue
The budget
a financial statement presented to the dail each year in october by the minister for finance
the means by which the governments fiscal policy is persued
the budgetary process
Each dept. prepares its spending plan for the year, submits to dept. of finance
Dept. of finance examines carefully, may be discussions and alterations
Once these are agreed, published in ‘book of estimates’ in september
Early october a white paper entitled ‘estimates of receipts and expenditure’ is published. estimates of revenue are as if tax rates have not changed. will identify whether there will be sufficient revenue to meet exp.
if shortfall - rates of tax will be increased in the budget or additional borrowing will be required
About a week later the budget is presented to dail for debate. any changes in exp. or taxation are announced
two legal acts passed during the budget process
the finance act
the appropriation act
current expenditure
gov spending on items which are used up during the year eg wages and salaries of gov employees, social welfare payments
current revenue
the money received by the gov. in direct and indirect taxation, and other income throughout the year
sources of current revenue
direct tax: PAYE, Corp. Tax
indirect tax: VAT, Customs Duty
Profits of state companies
fees on services eg obtain a passport
types of gov. expenditure
social welfare health education covid brexit
sources of capital revenue
loan repayments from local authorities/semi state bodies
sale of state property
borrowing through national loans: borrowing from financial markets by issuing bonds
grants/loans from foreign international institutions and EU, for the development of society
capital budget
contains expenditure by the gov on items which will increase the productive capacity of the country for future years
capital expenditure
investment by the gov in roads, schools, hospitals
sources of capital expenditure
borrowing by the gov. by issuing bonds on the financial markets and forms part of the national debt
EU restriction on National Debt
3% of GDP
why the distinction between current and capital expenditure
borrowing for capital is justified because: such items have a lifespan of many years - will generate future income for the country
not justified for current: will be paying back loans for goods/services that have already been used up
exchequer balance
difference between total current and capital expenditure and total gov. income
inflationary budget
government spending is increasing or taxation is decreasing
deflationary budget
government spending is decreasing or taxation is increasing
neutral budget
neither inflationary nor deflationary
eg budget 2015/2016
measures gov. can take to reduce a current budget deficit (increase revenue)
increase indirect taxes- (consequences)
rise in hidden economy
increase in inflation as good rises in price
fall in aggregate demand as price is higher
greater ability to fund public services
increase direct taxes: rise in hidden economy fall in employment- decrease in incentive to work fall in AD as spending power falls greater ability to fund public services
measures gov. can take to reduce a current budget deficit (decrease expenditure)
reduce numbers employed in public sector (redundancy packages)
- short term shock in paying redundancy payments
- possibility of increasing long term unemployment if not enough work in private sector
- fall in AD, spending power falls
- deterioration of public sectors
stabilise or cut wages in public sector
- possibility of industrial dispute
- skilled workers may leave to private sector/emigrate
- discourages effort/motivation
scale back on public services
- those on low incomes suffer fall in s.o.l.
- costs increase in long run to reintroduce these
- industrial disputes and protests by affected citizens
effects of a deficit on the current account
Negative Implications Of A Current Deficit:
increased taxation
cost savings required
increase in national debt
increased difficulty in managing finances
increased inflationary pressure
Positive Implications of Current Deficit:
economic growth
less pressure groups lobbying gov
revenue buoyancy
actual taxation revenue collected during the year that is greater than what had been planned for
if this happens- deflationary effect on the economy, whic is an example of fiscal drag
general gov. balance
total income minus expenditure of all arms of gov. local and national
national debt
total outstanding amount of money, borrowed by the central bank and not repaid to date, less liquid assets available
general government debt
includes the national debt, as well as local gov. debt and some other minor liabilities of the gov
dead weight debt
borrowed money that is not self financing
rolled over debt
substitution of an old debt for a new one
public sector borrowing requirement
government borrowing for:
current budget deficit
money borrowed for capital purposes
money borrowed for state sponsored bodies and local authorities
purpose of fiscal policy
stimulate economic growth in a period of recession
keep inflation at or below a targeted level
stabilise economic growth, thereby avoiding a boom and bust economical cycle
inflationary/expansionary fiscal policy
increasing AD by either reducing taxes and/or increasing expenditure
Thus the AD curve shifts rightward, increasing real output, reducing the output gap and allowing the price level to rise
used when there is not enough AD ie during a recession
deflationary/contractionary fiscal policy
reducing AD by either increasing taxes and/or cutting expenditure
thus the AD curve shifts leftward reducing real output, invoking a downward multiplier effect, widening the output gap and allowing the price level to drop
used when AD is too high ie during a boom
neutral fiscal policy
neither trying to boost/reduce AD
limitations of fiscal policy in stabilising trade cycles
time barriers crowding out gov. spending is insufficient higher borrowing costs influence of world events European monetary policy
measuring national debt
debt/GDP ratio
consequences of national debt
must be paid back with interest
increased burden on taxpayers of the future
greater the non-domestic debt the greater the burden on gov.
threat of default
threat to the stability of the euro currency
austerity budgets 2007-2014
times in which national debt is not a burden
self liquidating projects
infrastructure (productive or social)
The National Treasury Management Agency functions
manages the assets and liabilities of gov. by:
issuing bonds (borrowing) on behalf of gov.
manages national debt
manages the national pension reserve fund
provides staff and business support services
manages certain claims against the state for personal injury or property damage
manages the national development finance agency
self liquidating projects
if gov uses borrowed money on projects which will increase future productive capacity of country
such projects will eventually create sufficient income to repay the borrowed money plus interest
productive infrastrasture
state investment on those things that will directly increase output
eg motorways, port tunnel
ie self liquidating
social infrastructure
provision of services
no direct benefit to state as no additional tax accrues
however, there is indirect benefits of better educated workforce and healthier and more productive workers
ie healthcare, education
