Government Budget

Question 1

what is the goal of fiscal policy in a country? how is it achieved?

Answer 1

to avoid excessive deficits and debt (because that threatens stability (S-T) and gov solvency (L-T). if the country is in debt, their budget should be balanced or in surplus (despite the ongoing interest for debt), for them to be able to get out of debt

Question 2

state three types of deficit and define them

Answer 2

1. conventional = R - EX (used for international comparison)
2. primary = conventional - interest on public debt (tells us how much the conventional would be without the debt)
   - — if debt (and interest) is high enough, then a primary deficit turns into primary surplus
3. cyclically adjusted deficit = actual deficit is adjusted according to the business cycle the country is currently in (downward adjusting in expansion and upward adjusting in recession)

Question 3

how is the state budget altered? state some examples.

Answer 3

with structural reforms, which aim to increase revenue and decrease expenditure. they are done in the labour market, the pension system, healthcare system, long-term care system and education sector.

Question 4

why is fiscal policy important?

Answer 4

if a country is fiscally vulnerable, it can fail to meed its macro goal, which is:
C + S + T = C + I + G + Ex - Im (macro equilibrium)
reorder: Ex - Im = (Sp - Ip) + (T - G)
——T - G = fiscal balance; Sp - Ip = private savings and private investments; Ex - Im = current account
—— increase in deficit -> worsen current account, decrease in Ip or increase in Sp

Question 5

how is the state budget financed?

Answer 5

through money financing (central bank makes ‘fresh money’; usually prohibited), debt financing: domestic borrowing or foreign borrowing

Question 6

what are the maastricht criteria regarding public deficit and public debt?

Answer 6

public deficit should not exceed 3% of GDP.

public debt should not take up more than 60% of GDP.

Question 7

how is fiscal policy connected with inflation?

Answer 7

1. if there is money financing (to decrease the deficit and to avoid public debt accumulation), there is inflation (due to more supply of money and the same amount of demand)
2. if there is no money financing, fiscal policy on its own can also be inflationary (if it expands the demand too quickly and the supply cannot adjust)

Question 8

define the parts of the general government.

Answer 8

it is made up of:

• non-market producers that are mainly financed by compulsory payments (= <50% of costs are covered by sales - from a range of years)
• institutional units that take care of income redistribution (central, state, local gov and social security funds)

Question 9

state and explain the accounts general gov holds.

Answer 9

1. non-financial account (revenues on L, expenditures on R)
2. financial account (acquisitions-disposals of financial assets on L, incurrence-repayment of liabilities on R)
3. financial balance sheet (financial assets and liabilities at one moment in time)

Question 10

define general government revenues (sum of 6)

Answer 10

sum of:

• taxes on production and export
• property income (receivable)
• current taxes on income and wealth
• social contributions (receivable from employers, employees)
• other current trasfers (funds received by the EU, eg.)
• capital transfers (receivable investment grants, eg.)

Question 11

on which principle is computation of gov revenue based, accrual or cash-flow? why?

Answer 11

accrual. because we take into account ALL taxes that should be paid, including those who were not.

Question 12

how is general government debt defined? (gross or net)

Answer 12

at gross values (if they lend someone else money, that doesn’t count. it should be gross). it should equal to financial liabilities.

Question 13

what is anther name for public deficit or surplus?

Answer 13

net borrowing / lending