4.5.3: Public Sector Finances

Question 1

What are automatic stabilisers?

Answer 1

• Mechanism which reduces the impact of changes in the economy on national income eg government spending and taxation are automatic stabilisers
• In a recession, benefits increase as more people are unemployed so that the overall fall in AD is reduced
• In a boom, tax increases as people have more jobs and higher incomes
• Automatic stabilisers cannot prevent fluctuations

Question 2

What is discretionary fiscal policy?

Answer 2

• The deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary policies

Question 3

What is the difference between national and fiscal debt?

Answer 3

• National Debt: the sum of all government debts built up over many years
• Fiscal Debt: When the government spends more that it receives that year

Question 4

What is a cyclical deficit?

Answer 4

• The part of deficit that occurs because government spending and tax fluctuates around the trade cycle

Question 5

What is a structural deficit?

Answer 5

• Occurs when the cyclical deficit is zero; it is long term and not related to the state of the economy

Question 6

What is actual deficit?

Answer 6

• The structural deficit plus the fiscal deficit

Question 7

What are factors influencing the size of fiscal deficits?

Answer 7

• The trade cycle
• In the UK, the fiscal deficit peaked in 2010 at 10.1% of GDP
• Unforseen events
• Interest Rates

Question 8

What are the factors affecting national debt?

Answer 8

• Ageing populations as the government runs a structural deficit in order to fund pensions and care