Unit 4.2 taxing and spending policies - fiscal policy

Question 1

Public budget definition

Answer 1

A document by public entities detailing yearly receipts (from taxes, contributions, public assets) and intended spending (like core activities, public services etc)

Question 2

Balance equation

Answer 2

Income-spending = balance

Question 3

Spending can be split in 2 ways

Answer 3

1. Capital spending (investment in infrastructure, R&D) and current spending (everything else, such as public worker wages, the cost of services etc)
2. Into interest (considered outside the control of governments) and primary spending (everything that is not interest)

Question 4

Structural and Cyclical balance components

Answer 4

Structural balance: discretionary part, assuming output at potential level
Cyclical balance: automatic stabilisers

Question 5

Discretionary fiscal effort

Answer 5

Discretionary fiscal effort: an indicator by the EU commission that analysis and aggregates individual government budget decisions on both the income and spending sides

It is used as an indicator of the adequacy of measures implemented to reduce the structural deficit

Question 6

Ways to finance the public debt

Answer 6

1. Debt securities:
2. Loans from banks or international organisations
3. Hidden debt aka payables
4. Monetization of the deficit

Question 7

Why do governments have debt?

Answer 7

1. Automatic or discretionary stabilisation
2. Financing the cost of war or natural catastrophes
3. Long-term public investments or action against climate change

Question 8

External debt

Answer 8

external debt is the combined debts that a country’s government and private sectors owe to foreign entities