Fiscal policy regarding the budget deficit (Macro) Flashcards
cards outlining the importance of fiscal policy on government objectives. (22 cards)
What are the two types of government expenditure?
Current expenditure and capital expenditure, current being day to day on welfare ect, and capital is investment into projects such as HS2
Where does spending generally go?
Public good provision (roads)
Merit good provision (Healthcare)
Welfare (benefits/JSA)
Debt intrest
What are the two types of fiscal policy?
Expansionary and contractionary (Increasing or decreasing AD)
What will the AD influence?
Unemployment, price level and GDP
Effects of changes to direct taxes?
Affect consumption as a result of disposable incomes with consumers and lower corporation tax will incentivise firms.
What will changes to indirect taxes do?
Increasing VAT will reduce supply as not all the cost can be translated to consumers.
What are supply side fiscal policies?
Policies which will alter the level of LRAS or SRAS in the economy
What could increase supply?
Reducing corporation tax, reduce direct taxation (replacement ratio), Targeted government spending on Infrastructure
What is the fiscal stance?
The extent that fiscal policy will influence AD.
What will expansionary fiscal policy do to budget deficit?
Move further into a deficit as borrowing is used to finance expenditure.
What influence will economic growth have on budget deficit?
In a recession, there will be a deficit as tax revenue falls.
In a boom, there will be a surplus, depending on expenditure (multiplier indicates surplus)
What is a structural deficit?
When government finances remain in a deficit even if effects of growth are removed.
What is a cyclical deficit?
When the balance of finances is due to effects of economic cycle (falling or rising tax revenue)
What is the issue with a budget deficit?
-Rise in national debt
-Higher debt repayments
-increased AD (associated impacts)
-Crowding out
What is crowding out?
When private investors borrow from governments, the private sector investment may fall because the investors don’t invest into it. Meaning AD won’t increase.
What will happen if money supply increases to pay for national debt?
Could cause inflation (Fishers equation), such as in Zimbabwe in 2000 or Germany in 1920’s
What is the national debt?
A stock of all outstanding government debt yet to be repaid?
How much is the national debt in 2009?
90% of GDP in 2009
Issues with high national debt?
-More repaid in interest (opportunity cost)
-Future higher taxes (Austerity)
-Crowding out
-Exchange rate impact of increased interest rates.
What was national debt in December 2024?
£2.7 Trillion, 98.1% of GDP (Highest point since WW2)
Who manages the national debt?
The OBR (Office for budget responsibility)
What do the OBR do?
Economic forecasting
Evaluate risks involved in policy
Review austerity risks
Ensure fiscal policy isn’t influenced by political convenience
