T2 Topic 6: Gov debt and budget deficit

Question 1

What is a deficit and how is it financed?

Answer 1

If spending exceeds tax revenues

financed by borrowing from private sector/other countries

Question 2

What are gilts?

Answer 2

Government bonds that are sold through FMs

Question 3

What is debt?

Answer 3

Accumulation of past deficits

Question 4

What happened wrt government debt an deficits in UK ‘08-‘09? (3)

Answer 4

Large deficits ran up; fall in tax revenue and an increase in automatic stabilizers (eg. JSA)
Large deficits made worse by discretionary policy measures too (eg. cut in VAT in ‘08)

Question 5

See

Answer 5

Figures 6, 7, and general data nearby

Question 6

UK’s net debt? and gov. borrowing?

Answer 6

80. 7% of GDP

3. 1% gov borrowing in 2016

Question 7

3 causes of large gov debts?

Answer 7

wars
financial crises
recessions

Question 8

Budget deficit = ?

Answer 8

Spending-Revenue

Question 9

4 issues with measuring debt obligations of governments?

Answer 9

1) Inflation: need to measure debt obligations in real terms
2) Capital Assets: should we take into account a governments assets aswell as liabilities?
3) Unaccounted liabilities: governments sometimes have liabilities that may not be included in their debt calculations
4) The business cycle: due to automatic stabilizers a governments debt will increase and decrease over the business cycle even with constant FP

Question 10

Explain why inflation can make it difficult to measure debt obligations?

Answer 10

The government’s outstanding debt obligations ought to be measured in real (inflation adjusted) terms

Inflation lowers the real burden of debt tf if CBS aren’t independent governments can ‘inflate away’ debt
TF

Question 11

Define capital budgeting?

Answer 11

An accounting procedure that takes into account changes in capital (government assets)

Question 12

Using capital budgeting, how would this affect the measurement of government debt? and EV

Answer 12

It would mean capital expenditure wouldn’t count towards debt since government acquires an asset in return for its spending

EV: in reality can be difficult to decide what counts as CAPEX and what doesn’t

Question 13

What are contingent liabilities?

Answer 13

Obligations the government only has to pay if certain events occur

Question 14

Example of a contingent liability?

Answer 14

UK’s FSCS guarantees £85,000 of deposits held at most UK financial institutions; they payout IF the institution collapses; how do we account for this guarantee? in reality it is normally omitted

Question 15

Give another example of omitted liabilities?

Answer 15

Pension schemes for government employees; if government doesn’t have enough money they have to borrow and payout, how is this recorded on gov debt?