Public sector finances

Question 1

Cyclical deficit

Answer 1

A cyclical deficit occurs during a recession when public expenditure is high and tax revenues are low.

High unemployment-income tax revenue decrease, benefits will increase

Question 2

Structural deficit

Answer 2

A structural deficit is the budget deficit that remains at any point of the business cycle.

Question 3

Significant of budget deficits and national debt

Answer 3

Interest rates+financial crowding out

Future generations

Question 4

Interest rates on BD and ND`

Answer 4

An increase in government borrowing will increase the demand for money. This will then increase the interest rate.
This will increase the cost of borrowing for private sector firms, which means they will decrease their investment and this is called financial crowding out.

Question 5

Future generations

Answer 5

A high national debt will need to be paid back at some point. In order to do this, the government will either need to increase taxes or decrease public expenditure - or a combination of both.

Question 6

Why may high national debt not be a problem

Answer 6

1. The government is able to continue to borrow at a low interest rate (as this means that there will be a lower opportunity cost).
2. The national debt is a small percentage of GDP - this means that is is less significant and easier to pay back.
3. The money borrowed was used to pay for capital expenditure as these will encourage future economic growth - for example, money borrowed for a new school will increase human capital.