Public Sector Finances

Question 1

What is an automatic stabiliser

Answer 1

Automatic stabilisers are mechanisms that reduce the impact of changes in the
economy on national income; government spending and taxation are automatic stabilisers.

Question 2

What is a discretionary fiscal policy

Answer 2

Discretionary fiscal policy is the deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary
policies

Question 3

What is national debt?

Answer 3

The national debt is the sum of all government debts built up over many years whilst a fiscal deficit is when the government spends more than it receives that year

Question 4

What is a cyclical deficit
(what are some causes of it)

Answer 4

A cyclical deficit in economics refers to a budget deficit that occurs due to the natural ups and downs of the economic cycle. It happens when the economy is in a downturn or recession, and the government’s revenues (such as taxes) fall while its spending (particularly on welfare benefits like unemployment support) increases.

Here’s a breakdown of what causes a cyclical deficit:

Decreased Tax Revenue: During a recession, businesses earn less and people lose their jobs, which reduces income and corporate tax revenues.

Increased Government Spending: The government tends to spend more on welfare programs, unemployment benefits, and economic stimulus to support people and businesses affected by the downturn.A cyclical deficit is the part of the deficit that occurs because government spending
and tax fluctuates around the trade cycle.When the economy is in recession, tax revenues are low and spending is high creating a larger deficit.

Question 5

What is a structural deficit
(what are some causes of it)

Answer 5

A structural deficit in economics refers to a situation where a government’s budget deficit exists even when the economy is operating at full potential, without the influence of temporary factors such as economic recessions or booms. It occurs because of the underlying imbalance between government spending and revenue, which is not influenced by the current economic cycle.

In other words, the government is spending more than it is earning, and this is a persistent issue that is not caused by short-term economic fluctuations. The structural deficit can result from factors like:

-Permanent overspending by the government on areas like welfare, defense, or infrastructure.
-Under-collection of taxes due to factors like tax cuts or a shrinking tax base.
-Demographic changes like an aging population that increases demand for pensions and healthcare.