4.5.3 - Public sector finances

• Automatic stabilisers are mechanisms which reduce the impact of changes in the economy on national income; government spending and taxation are automatic stabilisers.
• These automatic stabilisers cannot prevent fluctuations; they simply reduce the size of these problem and there can be negative aspects to these stabilisers.
• Discretionary fiscal policy is the deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary policies.
• 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.
• 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.
• At the peak of the boom, there is no cyclical deficit; any deficit at this point is a structural deficit.
• The structural deficit is the fiscal deficit which occurs when the cyclical deficit is zero; it is long term and not related to the state of the economy.
• The actual deficit is the structural deficit plus the fiscal deficit.
• If the government has a structural deficit, it is likely that national debt will grow over time as the government has to consistently borrow money to finance spending.
• A budget deficit occurs when public expenditure is greater than tax revenue