Theme 4 Flashcards
what are the three types of spending to cause a budget deficit
transfer spending
current spending
capital spending
what is transfer spending
a type of spending that distributes payments directly from government to households e.g benefits
what is capital spending
spending on infrastructure that improves LRAS
what is current spending
spending on the public sector e.g their wages
which spending is short term and which is long term
transfer/current is ST
Capital is LT
which spending is superior overall as an EV
capital
list 3 policies to counteract a current account deficit
- ssp
- expenditure switching policies
- expenditure reduction policies
explain the use of expenditure switching policies
used to reduce C.A deficit
- uses appreciation and depreciation to redirect the spending of foreigners and domestic consumers
- for example if there is a depreciation:
- cost of imports become expensive so less imports are bought
- exports become cheaper so more exports are bought
as a result closes the current account deficit
explain expenditure reduction policies
policies targeted to influence consumer spending and help close budget deficit by reducing peoples incomes.
- as a result they’re unable to afford expensive imports and instead buy cheaper domestic produced goods
give examples of supply side policies to improve infrastructure (3)
- tax breaks and subsidies in private sector
- deregulation especially in housing market
- increase government capital spending
give supply side policies to improve the skills of a work force (productivity)
- increase availability of apprenticeships
- performance related pay
- 4 day week
- changes in immigration policies to attract skilled migrant workers
give ssp to increase labour market flexibility (deregulation)
- restrict power of TU
- reduce minimum wage or remove it
- allow 0 hour contracts
ssp to promote competition between firms
- block mergers and acquisitions
- reduce corp tax
- subsidies for new entrants
- privitisation
ssp to increase incentive to work
- cut and reform benefits
- increase personal allowance
- increase childcare provisions
- reduce income tax
- increase NMW
what are the two types of crowding out
financial crowding out
resource crowding out
explain financial crowding out
- when government debt is high and they continue to borrow from the central bank
- central bank would increase I.R
- private sector firms are deterred from loans due to high I.R leading to crowding out
- therefore public sector has higher market share of loans
2 benefits of C.A deficit
- sign of boom and high consumption (rise in quality of life)
- reduced protectionism = comparative advantage trades
2 cons of C.A deficit
- fall in LRAS due to low productivity and high inactivity (22.2%) leads to fall in international competitiveness
- fall in AD and negative multiplier effect
Evaluation to current account deficit
- 1/3 of BOP
- ST C.A vs Persistent LT C.A
- use of policies for corrections (3) ssp, expd switch, expd red
effects of LT C.A deficit (persistent)
- brain drain, capital flight, ho money outflow and hysterisis
Why may a budget deficit be good for the export industry?
increase capital spending
- increase in LRAS
- fall in cost of production
- fall in price of X
- increase in international competitiveness
2 cons of budget deficit
- increase in national debt (negative ME) kills future growth
- financial crowding out
what does the budget deficit depend on?
- depends on the type of spending
- original budget position
- size of the deficit (% of GDP)
- ST or LT deficit
- how it is financed as it better to be from tax revenue then from borrowing
