4.5.3 Public sector finances

• Discretionary fiscal policy


  Policy implemented through one-off policy changes, involving deliberate changes in government expenditure and taxes to influence aggregate demand
• Automatic stabilisers


  Policies which offset fluctuations in the economy, including transfer payments and taxes, triggered without government intervention
• Discretionary fiscal policy


  Keynes believed governments should increase spending and finance with more borrowing during recessions
• Fiscal (budget) deficit


  When government expenditure exceeds tax receipts in a financial year
• National debt


  The amount of money the government has borrowed at one time through issuing securities
• Cyclical deficit


  A temporary deficit related to the business cycle, occurring during recessions when governments increase spending to stimulate the economy
• Structural deficit


  A deficit due to an imbalance in government revenue and expenditure, existing at every point in the business cycle
• Governments during recessions


  Likely to spend more to stimulate the economy, increasing welfare payments and reducing tax revenues
• Interest rates on government debt increase

  The amount the government pays in interest payments increases, potentially increasing the deficit
• Privatisation of an industry


  Provides the government with a one-off payment, which could improve the budget deficit
• Government continuously running a deficit

  The size of the national debt increases
• Government reducing the size of their deficit

  The rate of increase of the total debt is slower, but the debt is still increasing
• Government running a budget surplus

  The size of the national debt decreases
• Fiscal deficit or large national debt

  Could lead to higher cost of borrowing, loss of confidence in government's ability to repay, higher taxes and austerity measures, inflation, and crowding out of the private sector