Government Expenditure

Question 1

What is the public sector net cash requirement? (PSNCR)

Answer 1

= the gap between Gov revenue+spending; the amount borrowed from the banking+private sector (budget deficit)

Question 2

Short-term solutions for the budget deficit? Long-term solutions?

Answer 2

Short-term=
•banks lend to Gov creating new bank deposits for Gov to spend
•^ increases money supply

Long-term=
•sell Gov bonds (gilts) to pension funds+insurance companies
•Gov may raise interest rates to persuade banks to buy

Question 3

What is the difference between national debt and budget deficit?

Answer 3

=cumulative over a number of years, total amount Gov owe to private sector+other purchases of gilts

=how much Gov has overspent+had to borrow in past year

Question 4

Cyclical deficit?

Structural deficit?

Answer 4

=parts of the budget that rise and fall with fluctuations in the economic cycle

=fundamental changes in the structure of economic activity e.g growth of single parents families dependent on welfare benefits
^improving= contractionary fiscal

Question 5

What are automatic stabilisers?

Answer 5

=features of Gov spending and taxation that automatically adjust with economic activity+minimise fluctuations

E.g in a recession Gov spending is high+tax low due to higher unemployment; in a boom, welfare benefits automatically lower since more workers are employed

Question 6

Cons of having a budget deficit?

Answer 6

• substantial interest payments= leakage from circular flow
• growing national debt
• lead to higher interest rates (persuade banks to buy bonds)
• lead to higher tax= discourage private sector investment in capital goods

^crowding out

Question 7

What is included in Gov spending?

What are the 3 types of spending?

Answer 7

=spending by central and local governments

• Capital expenditure= hospitals, schools, roads
• Current expenditure= day to day running of public services e.g teachers wages
• Transfer payments= pensioners, unemployed, child benefit