Public Sector Finances

Question 1

Automatic Stabilisers

Answer 1

These are changes in government expenditure and tax revenue which results in changes in GDP without any change in government policy.

Question 2

Discretionary Fiscal Policy

Answer 2

Involves deliberate changes in the public expenditure and taxation by the government in an attempt to influence the level of economic activity.
Eg
increasing spending on education
increasing retirement age
increasing taxation on demerit goods
implement subsidy

Question 3

Fiscal (Budget) Deficit

Answer 3

GS>Tax income

Question 4

Distinction between the fiscal deficit and the national debt

Answer 4

A fiscal deficit implies that public spending expenditure is greater than tax revenues

The national debt is the cumulative total of past government spending

National Debt - 1.56 trillion (2016)

Question 5

Distinction between Structural and Cyclical Deficits

Answer 5

Cyclical deficit is that portion of a country’s budget deficit that reflects changes in the economic cycle

Structural Deficit is the fiscal deficit which remains when the economy is operating at a normal, sustainable level of employment and activity.

Question 6

A persistent structural fiscal deficit and an increasing national debt might cause

Answer 6

Loss in country’s AAA credit rating, which could mean higher interest rates when it borrows money.

A fall in confidence, leading to a fall in FDI

Rising Interest Payment

Question 7

Factors influencing the size of fiscal deficits and surpluses and the National Debt in nominal terms

Answer 7

Structural Deficits and Surpluses - Structural Deficits and Surpluses are caused by the planned spending and tax decisions of government. Most governments are under pressure to raise government spending and reduce taxation.

Cyclical deficits and surpluses - Cyclical deficits and surpluses are caused by changes in government spending and tax revenues which change as GDP changes. They are out of control of the government in the short term. Eg a downturn in the UK economy is likely to have a negative affect on house prices, and the number of houses being bought and sold. The result is that the government receives less in taxes on property transactions (called ‘stamp duty’)

Unforeseen Events - Occasionally, governments have to respond to major unforeseen events which are not covered in monies set aside for contingencies. Floods and other natural disasters are unlikely to have much impact on the UK government finances but they might have a devastating impact on a small economy like Haiti or Jamaica. However, financial crisis in 2007-09 showed that major economies can be at risk from unforeseen events, between 2007-09, many developed countries were forced to nationalise (ie buy) banks and other financial institutions that were at risk of failing.

Debt Interest - Debt interest is part of a fiscal deficit or surplus. The larger the debt interest paid, the larger the deficit or the smaller the surplus. Debt interest is determined by two factors. One is the size of the national debt, the total amount the government owes to its creditors. The other is the rate of interest it has to pay on its debt. The higher the average rate of interest on its borrowing, the higher will be debt repayments.

Question 8

Primary Budget Deficits or Surpluses

Answer 8

Actual deficit but does not include interest payments on the National Debt.