Public Sector Finances Flashcards
(7 cards)
What is an automatic stabiliser
Automatic stabilisers are mechanisms that reduce the impact of changes in the
economy on national income; government spending and taxation are automatic stabilisers.
Examples
Progressive Income Taxes:
During economic downturns, lower incomes lead to reduced tax revenues. Conversely, during economic expansions, higher incomes lead to increased tax revenues, taking money out of the circular flow of income and spending.
Unemployment Insurance:
When unemployment rises during a recession, more people become eligible for unemployment benefits. This provides support to those out of work and stimulates economic activity by injecting money into the economy.
Social Welfare Programs:
Programs like welfare and food stamps provide income support to individuals and families facing economic hardship, helping to cushion the impact of economic downturns.
Corporate Income Taxes:
Similarly to individual income taxes, higher corporate profits during economic expansions lead to increased corporate tax revenues, while lower profits during recessions lead to reduced revenues.
What is a discretionary fiscal policy
Discretionary fiscal policy is the deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary
policies
Examples
Tax Cuts:
Tax cuts, like temporary reductions in income tax rates or sales tax, are a common discretionary fiscal policy tool. They aim to increase disposable income, boost consumer spending, and ultimately stimulate aggregate demand.
Increased Government Spending:
During economic downturns, governments may increase spending on infrastructure projects (like road building) or social programs (like unemployment benefits) to create jobs and increase demand.
Deferring Taxes:
Governments can also defer the payment of taxes, such as VAT or corporation tax, to provide businesses with a temporary financial break during a crisis.
Subsidies:
Governments can subsidize employment by reducing or halting employers’ national insurance contributions, encouraging businesses to retain or hire workers.
What is national debt?
The national debt is the sum of all government debts built up over many years whilst a fiscal deficit is when the government spends more than it receives that year
What is a cyclical deficit
(what are some causes of it)
A cyclical deficit in economics refers to a budget deficit that occurs due to the natural ups and downs of the economic cycle. It happens when the economy is in a downturn or recession, and the government’s revenues (such as taxes) fall while its spending (particularly on welfare benefits like unemployment support) increases.
Here’s a breakdown of what causes a cyclical deficit:
Decreased Tax Revenue: During a recession, businesses earn less and people lose their jobs, which reduces income and corporate tax revenues.
Increased Government Spending: The government tends to spend more on welfare programs, unemployment benefits, and economic stimulus to support people and businesses affected by the downturn.A cyclical deficit is the part of the deficit that occurs because government spending
and tax fluctuates around the trade cycle.When the economy is in recession, tax revenues are low and spending is high creating a larger deficit.
What is a structural deficit
(what are some causes of it)
A structural deficit in economics refers to a situation where a government’s budget deficit exists even when the economy is operating at full potential, without the influence of temporary factors such as economic recessions or booms. It occurs because of the underlying imbalance between government spending and revenue, which is not influenced by the current economic cycle.
In other words, the government is spending more than it is earning, and this is a persistent issue that is not caused by short-term economic fluctuations. The structural deficit can result from factors like:
-Permanent overspending by the government on areas like welfare, defense, or infrastructure.
-Under-collection of taxes due to factors like tax cuts or a shrinking tax base.
-Demographic changes like an aging population that increases demand for pensions and healthcare.
Factors influencing the size of fiscal deficits/national debts
Government Spending (more spending → bigger deficit).
Tax Revenue (lower tax revenue during recessions → bigger deficit).
Economic Cycle (recessions = higher deficit; booms = lower deficit).
Interest Rates (higher debt interest = bigger deficit).
Government Borrowing (more borrowing increases deficit).
Demographics and Economic Structure (long-term spending trends-e.g. aging population higher pension spending).
The significance of the size of fiscal deficits and national
debts
Economic Stability: High deficits may be necessary in the short term but can lead to instability if persistent.
Cost of Borrowing: High borrowing increases interest payments and crowding out of private investment.
Debt Sustainability: Unsustainable debt may lead to higher borrowing costs and loss of confidence.
Future Generations: High debt today can mean higher taxes or austerity for future generations.
Economic Growth: Fiscal deficits can boost growth in the short term but can crowd out private sector in the long term.
Ability to Respond: High debt limits the government’s ability to respond to future shocks.
Hyperinflation: persistent govt spending
Higher Interest Rates Due to Poorer Credit Rating
Explanation: When a country’s national debt grows too large relative to its GDP, its credit rating (assigned by agencies like Moody’s, S&P, or Fitch) may be downgraded. This reflects increased risk to investors, as they perceive the country to be less likely to meet its debt obligations.-
LEADS TO
Reputational Damage and Loss of Investor Confidence-Reduction in FDI due to reduced investor confidence
