Public Sector Finances

• Fiscal Surplus

  When tax revenues exceed government spending
• Fiscal Deficit

  When government spending exceeds tax revenues
• National Debt

  The total amount of money the British government owes to the private sector and other purchasers of UK gilts (e.g. Bank of England)
• How can National Debt be measured?

  1. Debt-to-GDP ratio

  2. Publicly held debt
• Debt-to-GDP ratio

  • The percentage of GDP that is composed of the UK'S national debt
  • Provides a relative measure to assess the country's capacity to support borrowing
  • A higher ratio indicates a heavier debt burden
  • Facilitates international comparisons
  • Reveals whether the debt burden is increasing or decreasing relative to economic output
• Publicly held debt

  • Debt held by external investors; includes individuals, institutions, and foreign governments
  • Excludes debt held by government agencies or intragovernmental entities
  • Represents the portion of debt that is actively traded in financial markets
  • Reflects the government's reliance on external financing
  • Relevant for creditworthiness and can influence interest rates and investor confidence
  • Provides insight into how willing international lenders are to support government spending
• Cyclical deficit

  Occurs when government spending and taxation revenues fluctuate thought the trade cycle
• Structural deficit

  Fiscal deficit that occurs when the cyclical deficit is lowest
• Actual deficit

  Cyclical deficit + structural deficit
• Structural surplus/balance

  Occurs when at the peak of a boom, the actual fiscal balance is in a surplus
• If a government has a structural deficit, the national debt is likely to grow over time
• Economists argue that structural deficits need to be eliminated through raising taxes, cutting government spending or some combination
• It is impossible to accurately measure the cyclical or structural deficit of an economy because trade cycles are not regular and the output gap is difficult to measure
• Capital expenditure

  Spending on long-term projects or buying of long-term assets that have long-term awards such as the HS2 railway, schools, hospitals, defence, infrastructure
• Capital expenditure

  • Increased spending on schools and universities to increase human capital
  • Green projects such as solar panels and wind turbines to prevent increasing pollution
• Current expenditure

  Day-to-day government spending that keeps the economy rolling such as wages for hospital staff, drugs and medications, teacher salaries, student loans
• Current budget deficit

  When government revenues are less than current expenditure
• Current budget surplus

  When current expenditure is less than government revenue
• Primary budget deficit


  The actual deficit but does not include interest payments on the national debt
• If a government is in financial difficulties, it needs to run a primary surplus at least equal to debt interest payments to avoid increasing the national debt
• Factors that influence the size of fiscal deficits and surpluses

  • Structural deficits and surpluses
  • Cyclical deficits and surpluses
  • Unforeseen events
  • Debt interest
• Structural deficits and surpluses

  Caused by the planned spending and tax decisions of the government
• Cyclical deficits and surpluses

  Caused by changes in government spending and tax revenues which change as GDP changes
• Unforeseen events

  • The financial crisis of 2007-08
• Debt interest

  • Depends on the total amount owed and the rate of interest
  • The rate of interest depends on the market rate and the government's credit rating
• It is possible for a government to increase its borrowing substantially but the total amount of interest paid on its National Debt to fall if it is able to refinance part of its debt at much lower rates of interest
• The size of fiscal deficits/surpluses

  Impacts interest rates, debt servicing, inter-generational equity, the rate of inflation, the country's credit rating, and FDI
• Impact on interest rates

  A rise in government borrowing should lead to a rise in market interest rates, but this may not happen for various reasons
• Impact on debt servicing

  A rise in borrowing leads to a rise the amount of interest paid, but the impact depends on the interest rate on current borrowing
• Impact on inter-generational equity

  National Debt is not prioritised for repayment because the cost of financing the debt is more important, and the real value of the debt declines over time due to inflation
• Impact on the rate of inflation

  Government borrowing to finance a deficit may have no impact on AD, but printing more money will shift AD and lead to demand-pull inflation
• Impact on the country's credit rating

  The credit rating influences the interest rate that has to be paid, with more debt leading to more risk
• Impact on FDI

  Countries with severe fiscal problems are likely to see FDI decrease due to the recession and government actions to deal with fiscal issues