Public Sector Finances
Public Sector Finances
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Automatic Stabilisers
Automatic Stabilisers are changes in the level of government spending / tax revenue, occurring without government intervention or a change in government policies. These reduce the impact of changes on national income in the economy
- Automatic Stabilisers cannot eradicate the fluctuations, it can only reduce the effect imposed on the economy
- For e.g, during a Recession, the government is likely to spend more on welfare benefits are unemployment increases
- For e.g, during a Boom, more people will be working and there will be higher incomes. Hence, ta revenue is likely to rise as more households pay income tax
Discretionary Fiscal Policy
This involved deliberate changes in the levels of public expenditure and taxation to influence the economic activity
Fiscal Deficit and National Debt
- Fiscal Deficit – government spending > tax revenue
- National Debt – accumulated amount of debt that the government owes to its holders
Structural and Cyclical Deficits
- Structural Deficit – the remaining fiscal deficit when the output gap is zero. This type of deficit is long-term and is unrelated to the state of the economy
- Cyclical Deficit – this type of deficit reflects changes in the economic cycle. For e.g, during a recession, tax revenues are low and government spending is high – causing a cyclical deficit
Actual Deficit = structural deficit + cyclical deficit
Factors affecting the size of Fiscal Deficits
- Discretionary Fiscal Policy
- The State of the Economy
- Trade Cycle – for e.g. during a recession, tax revenue decreases and government spending increases, causing a larger fiscal deficit
- Interest Rates – if the interest rates on the government debt increase, the fiscal deficit is likely to rise due to greater interest repayments
- Privatisation – privatisation offer one-off payments to the government which will decrease the deficit in the short-run
Factors influencing the size of National Debt
- Fiscal Deficits / Surpluses – the larger the fiscal deficit, the greater the national debt tends to be. Fiscal deficits over 3% are often a big contributor to the accumulation of National Debt
- Wars
- Economic Crises – e.g, the Financial Crisis of 2008
Significance of Fiscal Deficits and National Debts
- Higher Interest Rates – higher levels of borrowing may lead to a rise in interest rates caused as a result of a greater demand for money and an increase in the price of money
- Higher Opportunity Cost – through interest repayments, countries will have to spend a larger amount of money servicing their national debt, resulting in a greater opportunity cost
- Higher Inflation – AD will rise if the government continue to increase their spending without there being a corresponding decrease in private sector spending. This leads to greater fiscal deficits and higher inflationary pressures
- Intergenerational Inequality – it can be argued that future generations will have to pay the cost for the benefits gained from fiscal deficits and national debts
- Less Imports – the government may experience difficulty in repaying debt from abroad if not enough foreign currency is collected. This may cause issues for consumers as they may not be able to import goods from other countries
- Economic Growth – if there are supply side improvements caused by the government borrowing and spending on capital, this will result in greater growth
AQA Spec – Additional Content
The role of the office for Budget Responsibility
- Provides analysis of the UK’s finances
- They produce five-year forecasts for the economy, including the impacts of changes in taxes and government spending
- They also assess the government’s performance against its fiscal targets
- They assess the sustainability of public sector finances in the long run
Quick Fire Quiz – Knowledge Check
1. Explain what is meant by an ‘Automatic Stabiliser’ (2 marks)
2. Explain how Automatic Stabilisers may be used in a recession and in a boom (4 marks)
3. Identify what a Discretionary Fiscal Policy is (2 marks)
4. Distinguish between what is meant by ‘Fiscal Deficit’ and ‘National Debt’ (4 marks)
5. Distinguish between what is meant by a ‘Structural Deficit’ and a ‘Cyclical Deficit’ (4 marks)
6. Explain how Fiscal Deficits / Fiscal Surpluses affect the size of National Debt (4 marks)
7. Identify and explain six reasons highlighting the significance of Fiscal Deficits and National Debts (12 marks)
Next Revision Topics
- Taxation
- Public Expenditure
- Macroeconomic Policies in a Global Context
A Level Economics Past Papers
