4.5.3 Public Sector Finances

Question 1

4.5.3a
Automatic Stabiliser

Answer 1

components of fiscal policy that automatically adjust with the economic cycle, without government intervention

Question 2

4.5.3a
Discretionary Fiscal Policy

Answer 2

deliberate changes in government spending and taxation to influence economic activity.

Question 3

4.5.3b
Fiscal Deficit

Answer 3

Govt spending > tax revenue

Question 4

4.5.3b
National debt

Answer 4

Accumulation of fiscal deficits

Question 5

4.5.3c
Structural Defecit

Answer 5

Budget deficit caused by persistent government spending

Question 6

4.5.3c
Cyclical Defecit

Answer 6

Budget Defecit caused by automatic stabilisers during economic downturn

Question 7

4.5.3d
Factors Influencing size of Fiscal Defecits

Answer 7

• State of the economy: Recessions increase automatic stabiliser-related spending (e.g., benefits), reducing tax revenue and widening the deficit.
• Public expectations: In wealthier countries, citizens demand more services (e.g., healthcare, infrastructure), which raises government expenditure.
• Political ideology: Socialist-leaning governments often run higher deficits due to larger welfare and public sector programmes.
• Demographics: Ageing populations increase pension and healthcare obligations, inflating fiscal deficits.
• Size of national debt: Heavily indebted countries may face higher borrowing costs, discouraging further deficit-financed spending.
• Fiscal rules: Limits (e.g., the EU’s 3% deficit rule under the Maastricht Treaty) constrain how much governments can borrow

Question 8

4.5.3e
Factors Influencing size of national debt

Answer 8

• Persistent fiscal deficits: Repeated annual deficits accumulate, increasing national debt.
• Interest rates on bonds: Higher rates lead to faster debt accumulation due to greater debt servicing costs.
• Economic growth: Faster GDP growth helps reduce debt-to-GDP ratios, even if the nominal debt remains constant.
• Exchange rates: A falling currency increases the cost of repaying foreign-denominated debt, worsening debt burdens.
• Credit rating: Downgrades increase the cost of borrowing, making debt accumulation more expensive.

Question 9

4.5.3f
Significance of size of deficit and debt

Answer 9

• Inter-generational fairness
• Credit Ratings / future borrowing costs
• Austerity Measure
• Exchange Rate effects
• Debt to GDP ratio

Question 10

4.5.3f
Inter generationa