public sector finances

Question 1

Government borrowing

Answer 1

public sector borrowing is the amount the gov must borrow each year to finance its spending, equal in size to deficit

Question 2

National debt:

Answer 2

public sector debt is a measure of the accumulated borrowing owed by the government sector

Question 3

Cyclical budget deficit

Answer 3

gov borrows as a result of fluctuations in tax rev and spending due to the economic cycle, e.g. recession = tax rev fall + spending on unemployment benefits increase

Question 4

Automatic stabilisers:

Answer 4

mechanisms used to reduce the impact of changes in the economy on national income, thus reducing fluctuations around the trend rate, which occur automatically

Question 5

Structural budget deficit

Answer 5

an estimate of how large the fiscal deficit would be if the economy was operating at a normal, sustainable level of employment and activity

Question 6

Factors affecting the size of national debt:

Answer 6

• Rate of interest
• Rate of economic growth
• Government policy
• aging population

Question 7

PROS of debts and deficits:

Answer 7

• Temporary deficit can protect economics welfare
• Infrastructure investment will increase LRAS
• Can stimulate AD, a deficit can help economy escape a liquidity trap (savings ratio is high despite low interest rate – mon. Policy is ineffective)
• A deficit can help kick start growth in an economy which pays back debt

Question 8

Evaluation of pros of debts and deficits:

Answer 8

• LRAS not guaranteed to rise
• High deficits to stimulate an economy may act as a signal that future tax rates will rise, could lead to early savings, cutting C and I.

Question 9

CONS of debts and deficits: part 1

Answer 9

• Debt interest payments need paying back in the future – higher T or lower G = opportunity cost
• Need to borrow more leads to higher yield rates, which may reduce private setor growth

Question 10

CONS of debts and deficits: part 2

Answer 10

• More borrowing may reduce a country’s credit rating – diff country can demand higher interest rate for security
• High deficit and debt will reduce investor confidence – less FDI in the UK
• Deficits in a boom period are particularly unsustainable – structural deficit
• Inflation risks

Question 11

Evaluation of cons of debts and deficits:

Answer 11

Depends on interest rate – low = not costly borrowing.

Question 12

Policies to reduce fiscal deficits

Answer 12

fiscal deficit:

• fiscal austerity
• demand stimulus by high spending
• supply side reform
• use of automatic stabilisers

Question 13

Policies to reduce national debts

Answer 13

• Turn fiscal deficit into surplus
• Allow inflation to erode the real value of debt
• Default on debt where a gov stops paying back bond owners and writes off the remaining debt it owes
• Increase growth to reduce debt

Question 14

fiscal austerity

Answer 14

• tax rises or G cuts designed to reduce a deficit, e.g. benefits freeze under Cameron
• Reduce bureaucracy and X inefficiency as it encourages cost cutting by firms

Question 15

Supply side reform

Answer 15

increase growth creates a fiscal dividend and reduces debt to GDP ratio

Question 16

Use of automatic stabilisers

Answer 16

growth creates a budget surplus = higher T, lower G

Question 17

Discretionary fiscal policy

Answer 17

the deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary policies

Question 18

Structural deficit

Answer 18

The structural deficit is the fiscal deficit which occurs when the cyclical deficit is zero; it is long term and not related to the state of the economy.

Question 19

Factors affecting size of fiscal deficits

Answer 19

• trade cycle - tax fluctuations
• unforeseen events
• interest rates - debt increases

Question 20

Significance of fiscal deficits and national debts 1

Answer 20

• high level borrowing = raise IR as increase in demand for money, could lead to crowding out - but sometimes could borrow from overseas
• inter generational inequality to repay.
• high fiscal deficit = inflation
• high debt levels = reduced credit rating for government, as speculation do it defaulting on loans, making it riskier to loan to them

Question 21

Reducing poverty and inequality:

Answer 21

• progressive tax system like Nordics
• benefits and transfer payments like universal benefits
• provide welfare goods like healthcare, education and housing
• reduce wage differentials-> min wage, pay ratios, equal pay Legislation,
• maternity leave pay

Question 22

Changes in interest rate and supply of money:

Answer 22

• central bank to control inflation or exchange rate

Question 23

International Competitiveness

Answer 23

● Supply side measures will improve productivity and flexibility and can involve taxes and deregulation. They can encourage competition, forcing firms to be efficient and thus competitive within the global market. They can place an emphasis on quality of products and use tax incentives to encourage incentives. Education will improve the skills of the workforce and help improve flexibility. ​The UK government has established the ‘Red Tape Challenge’, which aims to simplify regulation for businesses

Question 24

Problems facing policy makers

Answer 24

• inaccurate info
• risks and uncertainties
• external shocks