LS19- Public Sector Finances

Question 1

Automatic stabilisers

Answer 1

• automatic fiscal changes as the economy moves through stages of the business/trade cycle
• e.g. a fall in tax revenues during a recession or an increase in welfare benefits paid out when unemployment is rising
• they do not require active intervention from the government but happen automatically in the background

Question 2

Discretionary fiscal policy

Answer 2

• a demand-side policy that uses government spending and taxation policy to influence AD

Question 3

Distinction between a fiscal deficit and the national debt

Answer 3

• a fiscal deficit occurs when the level of government spending is greater than the government tax revenue in any given year
• the national debt is the accumulation of all previous deficits - the deficit in one year adds to the national debt of previous years

Question 4

Distinction between structural and cyclical deficts

Answer 4

• cyclical deficits occur due to downturns in the business/trade cycle, usually as a result of a recession (gov receives less tax rev as profits and income fall - and gov spending increases)
• structural deficits are present even when an economy may be operating at the full employment level of output (may be difficult to correct and may be caused by a widespread tax avoidance culture, or poor governance)

Question 5

Factors influencing the size of fiscal deficits

Answer 5

• state of the economy
• housing market (indirect tax from property sales - stamp duty)
• political priorities (e.g. prioritising austerity over deficits)
• unforeseen events e.g. UK donations to Ukraine