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4.5.3 PUBLIC SECTOR FINANCES, image, image, image, image, image, image,…
4.5.3 PUBLIC SECTOR FINANCES
NATIONAL DEBT VS FISCAL DEFICIT
NATIONAL DEBT: -National debt is the sum of all government debts built up over many years
FISCAL DEFICIT - Annual difference between government spending and receipts
UK NATIONAL DEBT
In 2018 it was 87.7% of GDP
2022 it is 104% of GDP
TYPES OF FISCAL POLICY
AUTOMATIC STABILISERS
-AUTOMATIC STABILISERS are mechanism which reduce the impact of changes in the economy on income.
BENEFITS AND TAXATION.
IMPACT OF AUTO STABILISERS
-They cannot prevent fluctuations in the economy but they can reduce the impact that they have.
For example when the economy is in a recession more benefits are paid out reduces the fall in AD
When the economy is in a boom taxes increase which prevents AD from increasing too quickly.
DISCRETIONARY FISCAL POLICY
-DISCRETIONARY- when the government manipulates taxation and spending to influence the economy
CYCLICAL DEFICIT AND STRUCTURAL DEFICIT
CYCLICAL DEFICIT
-Is the part of the deficit that occurs when government spending and taxation fluctuates around the trade cycle
STRUCTURAL DEFICIT
-The size of the deficit when the economy is at the peak of the boom. Cyclical deficit is zero
-Trade deficit + Cyclical deficit.
FACTORS IMPACTING SIZE OF DEFICIT
-The trade cycle- during a downturn spending increases and tax revenues decrease.
-Unforseen events, eg natural disasters.
-Rate of interest as if rate of interest increases this will enlarge the deficit. UK pay at 7%
-Government Aims - austerity vs spending. Austerity policy reduced deficit by 75% since 2010.
-Number of dependents
-Privatisation.
WHAT ARE THE CONSEQUENCES OF FISCAL AND NATIONAL DEBTS
-High levels of borrowing may raise interest rates and even cause crowding out
-Countries have to spent a large amount servicing their debt eg UK spends 70 billion a year, but only small proportion of GDP.
-Economists can argue that it can cause intergenerational wealth inequality but this depends on capital vs current expenditure.
-High levels of debt cause credit ratings to decrease for governments from AAA to D which can make them more risky to loan to.
-If a government borrows money from abroad it might find it hard to repay debt.
-Borrowing can help growth if it is spent on capital expenditure.
WHAT IMPACTS SIZE OF NATIONAL DEBT
-if the government is continually running a deficit then national debt will increase over time
-General consensus view that a deficit over 3% will contribute to national debt
-Ageing population also impacts as government has to run a structural deficit to fund pensions.
