Public Sector Finances Flashcards
What is discretionary fiscal policy?
Intentional government policies to increase or decrease government spending or taxation.
What is a fiscal deficit?
When government spending exceeds tax revenue in a financial (fiscal) year, meaning the government needs to borrow money.
What is the national debt?
The total amount of money which a country’s government has borrowed.
What are automatic stabilisers (3)?
1) Automatic fiscal changes as the economy moves through stages of the business cycle.
2) E.g. during a recession, government spending on benefits will increase automatically as more become unemployed. This is automatic as it is not a government decision.
3) This increased spending then mitigates the damages of unemployment to AD, stabilising the economy.
What is a cyclical fiscal deficit?
When government spending exceeds tax revenue during a downturn in the economy. This is because tax revenues will be falling and government spending will be increasing.
What is a structural fiscal deficit?
When government spending exceeds tax revenue, even when the economy is operating at full employment. This is a more serious issue than a cyclical fiscal deficit.
What are the factors affecting the size of fiscal deficits (3)?
1) The economic cycle.
2) The housing market.
3) Unplanned events.
How can the economic cycle affect the fiscal deficit?
During periods of economic growth, fiscal deficits tend to be small or become surpluses.
How can the housing market affect the fiscal deficit?
During periods of growth in the housing market, tax revenues increase due to a rise in the amount of stamp duties (tax on house sales) received.
How can unplanned events affect the fiscal deficit?
Sometimes, governments will have to respond to events that are not covered by the budgets set aside. E.g. the financial crisis of 2007-08 led to the government spending billions to bail out financial institutions.
What are the 2 influences on the size of the national debt?
1) Government policy.
2) The size of fiscal deficits.
What is the impact of a rise in the national debt on interest rates (explain)?
A rise in government borrowing to pay for the national debt will lead to a rise in interest rates. This is because the demand for funds rises relative to their supply and interest is the price of borrowed money. Therefore, the rise in demand will lead to a rise in interest rates.
How can an increase in the fiscal deficit or national debt lead to inflation?
If a government needs more money, when tax receipts do not cover expenditure, they can either print more money or borrow money. Printing money would lead to inflation as more money would be in circulation.
What is the impact of a rise in the national debt on the debt service?
As the national debt increases, the more the government have to spend servicing the debt through interest paid. Debt interest features in current spending, potentially increasing the fiscal deficit.
What are credit ratings (3)?
1) A rating given to countries by private investment companies, estimating the likelihood that a country will default (not be able to pay) on its debts.
2) The best rating is AAA, and the worst is D.
3) It is influenced by factors such as national debt and financial history.
