Lesson 51-Public sector finances

Question 1

What are discretionary fiscal changes?

Answer 1

These are deliberate changes in direct and indirect taxation and govt spending for example extra capital spending on roads or more money to the NHS

Question 2

What are Automatic stabilisers?

Answer 2

These are changes in tax revenues and government spending that come about automatically as an economy moves through the business cycle

Question 3

When a govt borrows what does it issue debts in the form of?

Answer 3

It issues debt in the form of bonds

Question 4

What is government borrowing?

Answer 4

It is the amount the government must borrow each year to finance its spending

Question 5

What is national debt?

Answer 5

National debt is a measure of the accumulated national debt owed by the government sector

Question 6

What is public sector debt?

Answer 6

Public sector debt is owed by central and local government and also by state owned corporations

Question 7

Give two cyclical factors which influence the size of fiscal deficits

Answer 7

.Rate of unemployment
.Consumer spending
.Business profits
.Automatic stabilisers

Question 8

Give two long run factors which influence the size of fiscal deficits

Answer 8

.Size of the Welfare state
.Relative level of welfare benefits
.Demographic factors
.Size of the tax base and base rates
.Efficiency of the public sector

Question 9

Give two factors which influence the size of national debt

Answer 9

.Scale of government spending
.Level of tax revenues
.Cost of servicing debt+state bail outs

Question 10

What can a high level of government debt lead to?

Answer 10

Both a reduction in investment and a requirement on future generations to continue paying off the debts

Question 11

Give two arguments that rising national debt creates economic problems

Answer 11

.High fiscal deficits cause rising debt interest payments
.An increase in national debt is likely to cause a tax rise in the future-this will cut disposable incomes of tax payers
.It is unfair if a rising tax burden falls on future generations of tax payers rather than people who benefit from government spending now

Question 12

Give an argument in support of government spending

Answer 12

.A rise in borrowing to fund extra government spending can have powerful effects on AD, output and employment
.There is an automatic rise in the budget deficit to cushion the fall in AD back towards pre recession levels
.If a fiscal stimulus works, then the budget deficit will improve as a result of higher tax revenues
.It makes sense for the government to borrow money if interest rates are low