A fiscal deficit is when public expenditure exceeds tax revenue whereas national debt is the total amount of money the government has borrowed in a given time
Factors Influencing Fiscal Deficits
The business cycle
interest payments
Privatisation
National Debt
If the government continues to run a deficit the size of the national debt increases
If the government reduces the deficit the national debt still rises, but at a slower rate
If the government runs a surplus the size of the deficit will decrease
The Business Cycle
During recessions, the government spend more to stimulate the economy and receives less in income tax and VAT so the deficit is larger
Interest Payments
If interest rates on government debt increase the government's repayments rise so the deficit may increase
Privatisation
The government can sell an industry to earn more money with a one-off payment which could improve the deficit
Significance of the Size of the Deficit and National Debt
Cost of borrowing rises as the government's borrowing increases demand for money
If confidence is lost in the government's ability to repay debts they may have to raise interest rates to increase demand for bonds to finance the debt
Government may resort to contractionary fiscal policy or austerity
A deficit could be inflationary if it increases AD through increased government spending
