public sector finances

Question 1

what are automatic stabilisers?

Answer 1

are mechanisms which reduce the impact of changes in the economy on national income
prevents too much change in the economy

Question 2

give examples of automatic stabilisers

Answer 2

govt spending
taxation
benefits

Question 3

how are benefits used as a stabiliser?

Answer 3

in a recession, benefits inc as more people are unemployed as so benefits are a stabiliser as the overall fall in AD is reduced

Question 4

how is tax used as an automatic stabiliser?

Answer 4

• during a boom, tax inc as people have more jobs and higher incomes
  
  • this tax reduced disposable income
  • decreases consumption and AD so demand doesnt grow too high

Question 5

how can you evaluate the use of automatic stabilisers?

Answer 5

• these automatic stabilisers cant prevent fluctuations
  
  • they simply reduce the size of these problems and there can be negative aspects to these stabilisers
  • benefits may act as a disincentive to work and lead to higher unemployment
  • high levels of tax can decrease the incentive to work had

Question 6

what is discretionary fiscal policy?

Answer 6

the deliberate manipulation of govt expenditure and taxes to influence the economy

Question 7

what is national debt?

Answer 7

the sum of all govt debts built up over many years

Question 8

what is a fiscal deficit ?

Answer 8

when the govt spends more than it receives that year

Question 9

how can a fiscal deficit be measured

Answer 9

• they can either be measured in money terms or as a % of GDP

Question 10

which way of measuring fiscal deficit is more useful?

Answer 10

GDP measure is more useful as it gives an indication of how easy it will be for the govt to finance a deficit or repay national debt

Question 11

what is the public sector net cash requirement?

Answer 11

• the public sector net cash requirement- the total amount of money that the govt needs to borrow in order to fulfil its spending plans
  
  • the difference between spending and revenue

Question 12

what is a cyclical deficit?

Answer 12

the part of the deficit that occurs because gov spending and tax fluctuates around the trade cycle
budget deficit rises in the downturn of the economic cycle and falls in the recovery part of the economic cycle

Question 13

what is a structural deficit? When does a fiscal deficit occur

Answer 13

the fiscal deficit which occurs when the cyclical deficit is zero
its long term and not related to the state of the economy
results from structural change in the economy (not from the economic cycle)
- at the peak of the boom there is no cyclical deficit→ any deficit at this point is a structural deficit

Question 14

what is an actual deficit?

Answer 14

the structural deficit plus the fiscal deficit

Question 15

when does a structural surplus occur?

Answer 15

structural surplus occurs when at the peak of the boom there is an actual fiscal surplus

Question 16

when does a structural balance occur?

Answer 16

structural balance occurs when at the peak of the boom, actual fiscal balance is 0

Question 17

why will a structural deficit cause national debt to grow?

Answer 17

this is because govt will have to consistently borrow to finance spending
- therefore it is argued that structural deficits need to be eliminated

Question 18

why is it difficult to eliminate a structural deficit?

Answer 18

this is difficult as its impossible to know what part of the deficit is structural and what part is cyclic just as its impossible to know the size of the output gap

Question 19

recall the factors affecting the size of the fiscal deficit?

Answer 19

the trade cycle
interest rates
unforseen events
privatisation
govt aims
the number of dependents in a country

Question 20

how does the trade cycle affect fiscal deficit?

Answer 20

during a downturn, govt tax revenue decreases while spending increases so the deficit inc

Question 21

how do unforseen events affect the size of the fiscal deficit?

Answer 21

e.g natural disasters, recessions lead to increases in spending which inc the deficit

Question 22

how do interest rates affect the size of fiscal deficit?

Answer 22

• if interest on govt debt inc, the amount the govt pays in interest repayments inc
• likely to inc the deficit
• the impact of this depends on how significant interest repayments are in the size of the deficit
• interest rates depend on market rates and the credit ratings of the govt

Question 23

how does privatisation affect the size of fiscal deficit?

Answer 23

• privatisation provides one of payments to the govt which will decrease the deficit in the short term
  
  • depends on the value

Question 24

how do govt aims affect the size of a fiscal deficit?

Answer 24

• govt aims are important in the size of the deficit
  
  • this will influence their fiscal policy
  • e.g austerity aim has helped to decrease the size of the deficit but attempting to inc AD would increase spending

Question 25

what factors affect the size of national debt?

Answer 25

- if the gov is continuously running a budget deficit, then the national debt will increase overtime - there is a view that fiscal deficits over 3% will lead to growing national debt as a proportion of GDP - it is only when a govt runs a budget surplus that the size of the national debt increases - ageing populations tend to contribute to a high national debt since the govt runs a structural deficit in order to fund their pensions and care - leads to high national debt

Question 26

recall the effects of fiscal deficits and national debts?

Answer 26

-high levels of borrowing may raise interest rates -countries have to spend a large amount of money on servicing their national debt -some argue that high fiscal deficits and national debts benefit citizens today at the expense of future generations - can cause inflation - a reduced credit rating for the gov -if a govt has borrowed from abroad it may have difficulties getting enough foreign currency to make repayments on its debt

Question 27

why may high levels of borrowing raise interest rates and fiscal deficit? how can you evaluate this

Answer 27

- as theres an inc in demand for money will increase the price of money - could cause crowding out however govt may borrow from overseas and during a recession, private sector investment always falls which means interest rates may remain unchanged

Question 28

how do countries service their national debt?

Answer 28

- countries have to spend a large amount of money on servicing their national debt through interest repayments - high opportunity cost

Question 29

what is a primary budget deficit?

Answer 29

a primary budget deficit is the actual budget deficit but doesnt include interest repayments on national debt

Question 30

what is the impact of a primary budget deficit dependent on?

Answer 30

the impact will depend on the level of interest rates and the size of the primary deficit compared to interest repayments

Question 31

what is a liquidity trap?

Answer 31

in a liquidity trap (when interest rates are extremely low) the govt can often borrow at very low rates for long periods of time

Question 32

why do some think that fiscal deficits cause intergenerational inequality?

Answer 32

- some argue that high fiscal deficits and national debts benefit citizens today at the expense of future generations - can cause intergenerational inequality More spending now may mean higher tax for future for the govt to finance this deficit

Question 33

what do the concerns over a fiscal deficit depend on

Answer 33

depend upon whether the deficit is caused by current expenditure alone or whether its just caused by capital expenditure

Question 34

what is a current budget deficit?

Answer 34

- one where the govt revenues are less than current expenditure - govt has to borrow money to finance day to day spending

Question 35

why is it argued that the govt should run a budget surplus?

Answer 35

- its argued that the govt should run a current budget surplus to enable it to invest for the future - except in recessions where they can run a deficit to inc AD

Question 36

why are current budget deficits problematic?

Answer 36

as it means future generations are forced to pay the bill for todays expenditure

Question 37

how can you evaluate the point that a current budget deficit is problematic?

Answer 37

- if the deficit is due to their capital expenditure, the future generations benefit from increased spending - so their extra tax bill to pay for todays borrowing can be justified - the value of the debt tends to fall overtime as inflation erodes its value - also because a countrys GDP grows meaning that debt is easier to pay off so this limits the impacts on future generations

Question 38

how do high fiscal deficits cause inflation?

Answer 38

- if the govt increases their spending and there is no similar fall in the private sector spending, AD will rise and this can be inflationary - also if a gov is unable to borrow money they will print more money which will cause hyperinflation - e.g Germany in 1923

Question 39

how can you evaluate the point that high fiscal deficits can cause inflation?

Answer 39

depends on how much money is printed and where the economy is producing on the LRAS

Question 40

how can high levels of debt result in a reduced credit rating for the gov?

Answer 40

- private sector companies estimate the likelihood that a govt will default on its debt and give it a rating - lower credit rating = lending to the gov is riskier and so higher interest rates are demanded from lenders

Question 41

how can you evaluate the point that high levels of debt can result in a reduced credit rating for the govt?

Answer 41

- its not the size of the debt that influences the level of risk involved with lending the money - its whether the country has ever defaulted on their loans before and their current economic/political climate

Question 42

why may a govt borrowing from abroad cause issues?

Answer 42

if a govt has borrowed from abroad it may have difficulties getting enough foreign currency to make repayments on its debt - could cause problems for consumers because if theres not enough foreign currency they wont be able to import goods

Question 43

how can you evaluate the point that govt borrowing from abroad may cause issues?

Answer 43

- govt borrowing can benefit growth if used for capital spending - will improve supply side of the economy - therefore reduce deficit in the long term - budget deficit can be used as a tool for short term demand management - Keynesians argue a deficit is acceptable to use as a stimulus in demand during recessions

Question 44

what are the cyclical factors which affect the size of the fiscal deficit

Answer 44

unemployment rate consumer spending business profits automatic stabilisers

Question 45

what are the structural factors affecting the size of fiscal deficit

Answer 45

size of welfare assistance available relative level of welfare benefits demographic factors e.g ageing population size of tax base and tax rates efficiency/productivity of the public sector

Question 46

what is the difference between a deficit and debt

Answer 46

deficit is a flow concept measured over a period of a time debt is a stock concept at a certain point in time a budget deficit adds to national debt while a surplus reduces it

Question 47

what is the debt to GDP ratio

Answer 47

govt will finance a structural deficit through borrowing lenders keep an eye on debt to GDP ratio because if it rises too much then the govt will not be able to repay the debt or the govt may allow inflation to rise to reduce the real value of the debt

Question 48

what may be the effects of large national debt

Answer 48

countries may stop lending to that countries govt future tax payers may be left wit large interest payments on debt to pay off debt repayments have an opportunity cost country with a large debt is less attractive to FDI due to uncertainty could lead to crowding out govt may default on debt