Public Sector Finances

• Automatic stabilizers are automatic fiscal policies/changes that offset fluctuations as the economy moves through the trade cycle -  they are mechanisms already built into governments e.g increase in transfer payments/benefits when unemployment is rising.
• A discretionary fiscal policy is a one-off demand side policy using government spending and taxation to influence aggregate demand.
• A fiscal deficit is when government expenditure exceeds government revenue (tax revenue) in a one-year period.
• National debt is the accumulation of yearly fiscal deficits and the total amount of money owed with interest repayments
• Cyclical deficits where government expenditure > revenue occur due to downturns in the trade cycle (recessions where there is less tax revenue and increased government spending) however they are temporary and self-correcting
• Structural deficits are simply the imbalance where government expenditure > revenue and therefore can exist every point of the trade cycle and are difficult to correct.
• Factors affecting the size of fiscal deficits =

  • State of the economy (government spending and revenue)
  • Privatisation (government revenue)
  • housing market (government revenue)
  • Unforeseen circumstances (government spending)
• The state of the economy affects the size of the fiscal deficit as:

  • government revenue increases during a boom from tax revenue
  • government revenue decreases during a recession from tax revenue
  • government spending increases during a recession
  • government spending decreases during a boom
• Unforeseen events affect the size of the fiscal deficit as:

  • This may require increased financial government support e.g the UK donated over £2 billion in assistance to the Ukraine in 2022
• Privatisation affects the size of the fiscal deficit as:

  • privatising an industry provides the government with a one-off payment, increasing government revenue
• The housing market affect the size of the fiscal deficit as:

  • Governments receive an indirect tax (stamp duty) from property sales
  • This revenue increases during a boom
  • This revenue decreases during a reccession
• Factors affecting the size on national debts:

  • Size of fiscal deficits
  • Interest rates on the repayment
  • Government policies on taxation + government spending
• If there are high levels of national debt, the government may increase interest rates to make lenders more inclined to lend to them due to high returns
• If there are high levels of national debt, there is a high opportunity cost of every £ spent on interest payments that could have been reinvested into the economy
• If there are high levels of national debt, future generations of taxpayers will also feel the burden of paying the debt.
• If there are high levels of national debt, (a fiscal deficit could increase AD - increased government spending) and inflation means the government pays back lenders with money worth less than the original amount - it is the same number, but its value decreased.
• If there are high levels of national debt, countries run the risk of crowding out, decreasing private sector activity and investment
• Automatic stabilisers do not require active intervention from the government whereas discretionary fiscal policies are deliberate government changes to influence AD
• Cyclical deficits are self-correcting whereas structural deficits are hard to correct