L19- Public Sector Finances

Question 1

Distinction between automatic stabilisers and discretionary fiscal policy

Answer 1

• Discretionary fiscal policy= implemented through one-off policy changes, involves deliberate changes in govt expenditure and taxes with the intention of influencing AD- Keynes believed during recessions, govts
  should increase spending, and finance this with more borrowing.

-Automatic stabilisers= policies which offset fluctuations in the economy. (transfer payments, taxes) They are triggered without
govt intervention.

Question 2

Distinction between a fiscal deficit and the national debt

Answer 2

• fiscal deficit= when govt. spending exceeds tax receipts in a financial year
• national debt= amount of money govt. has borrowed at one time through issuing securities by the Treasury

Question 3

Distinction between structural and cyclical deficits

Answer 3

• cyclical deficit= temporary deficit, which is related to the business cycle. May occur during recessions, when govts increase spending to stimulate the economy
• structural deficit= due to imbalance in revenue and expenditure of the govt., so it exists at every point in business cycle

Question 4

Factors influencing the size of fiscal deficits

Answer 4

• The business cycle= govts likely to spend more during recessions (welfare payments)= try and stimulate the economy + tax revenues from income tax and VAT down ( people earning and spending less)
• Interest payments = If interest rates increase on govt debt, amount govt pays in interest payments up, so the deficit might increase.

-Privatisation= (An industry is privatised when the govt sells the industry to the private sector) This provides them with a one-off payment, which could improve the budget deficit.

Question 5

Factors influencing the size of fiscal deficits (short)

Answer 5

• business cycle
• interest rates
• privatisation

Question 6

Factors influencing the size of national debts

Answer 6

-national debt = accumulation of govt deficit over time, total amount the govt owes.

-If govt is continuously running a deficit, size of debt increases.
- If the govt reduces size of deficit, rate of increase of the total debt is slower, but the debt is still increasing.
- only when govt runs a budget surplus that the size of the national debt decreases.