Role of the state in the macroeconomy: public sector finances Microeconomics Topic 1: The Economic Problem Role of the state in the macroeconomy: public sector finances

Microeconomics Topic 1: The Economic Problem 4.5.3 Unit content Students should be able to: Distinguish between automatic stabilisers and discretionary fiscal policy Distinguish between a fiscal deficit and the national debt Distinguish between structural and cyclical deficits Analyse factors influencing the size of fiscal deficits Assess the factors influencing the size of national debts Evaluate the significance of the size of fiscal deficits and national debts

Microeconomics Topic 1: The Economic Problem (a) introduction Microeconomics Topic 1: The Economic Problem The Financial Crisis of 2008 resulted in many countries using fiscal policy as a __________ tool to stimulate the economy. The UK government were forced to __________ Northern Rock and __________ savers their money. Having bought Northern Rock they then bought most of the Royal Bank of Scotland and part of Lloyds Bank. In the US, the authorities allowed __________ Brothers (an investment bank) to fail in 2008. This caused chaos and so they then guaranteed to support other ____________ institutions.   financial, guarantee, Keynesian, Lehman, nationalise

(a) introduction: UK and US reactions to the 2008 crisis Microeconomics Topic 1: The Economic Problem Both the UK and US bailed out their banking systems and implemented expansionary monetary policy. What does this mean? However one had a much looser fiscal policy than the other, which country? The US government budget deficit was a larger % of their GDP than the UK from 2008 to 2012 and Keynesians would say this lead to their _________ growth (see graph overleaf).  

(a) introduction: UK and US reactions to the 2008 crisis Microeconomics Topic 1: The Economic Problem

(a) Definitions: automatic stabilisers Microeconomics Topic 1: The Economic Problem (a) Definitions: automatic stabilisers Automatic stabilisers: are mechanisms that reduce the impact of changes in the economy on national income. AKA built-in stabilisers. What happens during times of high economic growth?

(a) Automatic stabilisers in a recession Microeconomics Topic 1: The Economic Problem (a) Automatic stabilisers in a recession What happens during a recession?

(a) Definitions: discretionary fiscal policy and some acronyms Microeconomics Topic 1: The Economic Problem (a) Definitions: discretionary fiscal policy and some acronyms Discretionary fiscal policy: the ___________ manipulation of government expenditure and taxes to influence the economy. AKA active fiscal policy. PSNB (public sector net borrowing) is the difference between _____________ spending and its receipts in the UK. It can be a budget ______ or a budget surplus Other acronyms include PSBR which is public sector _______________ requirement and PSND: public sector net debt which we tend to call the national ________ borrowing, debt, deficit, deliberate, government

Microeconomics Topic 1: The Economic Problem (a) multiple choice Microeconomics Topic 1: The Economic Problem 1. The public sector borrowing requirement (PSBR) is A. National debt B. Government’s borrowing from the IMF C. Export earnings less import spending D. Total annual borrowing of the central government, local authorities, and nationalized industries 2.Which of the following is not an example of an expansionary fiscal policy? A. A decrease in income tax B. An increase in government spending C. A decrease in tax allowances on unearned income D. A decrease in corporation tax

Microeconomics Topic 1: The Economic Problem (a) multiple choice Microeconomics Topic 1: The Economic Problem 3. Which of the following is least likely to lead to an increase in the size of the PSBR? A. An ageing population B. An increase in interest payments on national debt C. The level of employment increases D. The government nationalises loss-making firms

Microeconomics Topic 1: The Economic Problem (a) Data response Microeconomics Topic 1: The Economic Problem

Microeconomics Topic 1: The Economic Problem (a) Data response Microeconomics Topic 1: The Economic Problem 1. Look at the graph showing UK economic performance. What would you expect to be happening to tax revenues and government spending from 2001 through to 2008? 2. Look at the graph showing government spending and income. What has happened to the Budget from 2002 onwards and what does this suggest has happened to discretionary fiscal policy?

(b) Definitions: fiscal deficit and national debt Microeconomics Topic 1: The Economic Problem (b) Definitions: fiscal deficit and national debt What is the difference between a fiscal deficit and the national debt?

(b) UK: fiscal deficit and national debt Microeconomics Topic 1: The Economic Problem (b) UK: fiscal deficit and national debt In the UK, a decision was made by the incoming government in _____ (Conservative: David Cameron and _______________ previously Labour Gordon Brown and ______________) to prioritise cutting the fiscal deficit in order to control the National Debt. The United Kingdom recorded a Government Budget deficit equal to 4.40 % of the country's GDP in ______ Government Budget in the United Kingdom averaged -4.06% of GDP from 1995 until 2015, reaching an all time _____ of 1.20% of GDP in 2000 and a record _____ of -10.80% of GDP in 2009 2010, 2015, Alistair Darling, George Osborne, high, low

Public Sector Borrowing What is government borrowing? (b) The UK budget and National Debt Public Sector Borrowing % of GDP Public Sector Net Debt 2007–08 2.7 36.7 2008–09 6.7 49.0 2009–10 10.2 62.0 2010–11 8.6 68.7 2011–12 7.0 72.3 2012–13 7.2 76.7 2013–14 5.7 79.1 2014–15 4.9 80.5 2015–16 4.0 80.2 What is government borrowing? Public sector borrowing is the amount the government must borrow each year to finance their spending What is national debt? Public sector debt is a measure of the accumulated national debt owed by the government sector Source: OBR, July 2015

(b) Which countries had the highest and lowest gross government debt (2015)?

(b) UK: net borrowing: comment Microeconomics Topic 1: The Economic Problem (b) UK: net borrowing: comment

(c) Definitions: structural and cyclical deficits Microeconomics Topic 1: The Economic Problem (c) Definitions: structural and cyclical deficits Cyclical deficit: a cyclical fiscal deficit occurs during a ____________ in the economy because tax revenues will be _____________ and government expenditure (for example on social ____________) will be increasing. Such a deficit should disappear when the economy returns to its trend ________ rate Structural deficit: a structural fiscal deficit remains even when the _________ is operating at its ________ potential. It is, therefore, regarded as a more serious problem than a _________ deficit. benefits, cyclical, downturn, economy, falling, full, growth

(c) Is a high level of public debt dangerous? Microeconomics Topic 1: The Economic Problem (c) Is a high level of public debt dangerous? Public debt is the total accumulated stock of debt issued by a government yet to be re-paid, aka the National Debt High deficits cause rising _______________________ which in 2015-16 are forecast to be £43 billion or £700 per head of population This interest burden has an o__________ c______ for less interest on debt could free up extra spending on ______________. State borrowing of £70 billion is equivalent to _______ per head of the UK population An increase in the national debt is likely to cause higher _______ in the future. This will cut the ____________ incomes of tax payers and reduce growth in the ___________ sector

(c) Is a high level of public debt dangerous? Microeconomics Topic 1: The Economic Problem (c) Is a high level of public debt dangerous? It might be unfair if the rising tax burden falls more heavily on _________ generations of ______ payers rather than people who benefit from government spending ______ “A high level of government ___________ will result in money having to be spent repaying that debt. This can lead to both a ___________ in investment and a requirement on future generations to continue _________ off these debts, which could in turn have a negative impact on _________ well-being” ONS borrowing, future, national, now, paying, reduction, tax

(c )Austerity Is the Conservative government right to continue following a policy of fiscal austerity in order to reduce the budget deficit?

(c) Austerity arguments in favour? Microeconomics Topic 1: The Economic Problem (c) Austerity arguments in favour?

(c) Austerity arguments against? Microeconomics Topic 1: The Economic Problem (c) Austerity arguments against?

(d) What factors influence the size of fiscal deficits? Microeconomics Topic 1: The Economic Problem the state of the economy: if the economy is growing then the housing market which influences political priorities: if government spends more then unplanned events: e.g. debt interest depends on the

(d) factors influencing the size of fiscal deficits Microeconomics Topic 1: The Economic Problem Total UK government receipts are forecast to be _______________ in 2016–17, or ______ of UK GDP This is equivalent to roughly £13,500 for every adult in the UK, or _________ per person Not all of this revenue comes from taxes: taxes as defined in the National Accounts are forecast to raise ______________ in 2016–17, with the remainder provided by surpluses 36.9%, £10,900, £665.1 billion, £716.5 billion

(e) factors influencing the size of the national debt Microeconomics Topic 1: The Economic Problem The UK national debt is the total amount of money the British government owes to the private sector and other purchasers of UK gilts. In September 2016 Public sector net debt is £1,627.2 billion, or _____% of GDP

(e) UK national debt from 1910: comment Microeconomics Topic 1: The Economic Problem

(f) significance of the size of fiscal deficits and national debts Microeconomics Topic 1: The Economic Problem (f) significance of the size of fiscal deficits and national debts Deficits and debt may be measured in nominal terms (monetary value) or as a percentage of GDP. The most useful measure of national debt is debt as a % of GDP e.g. in 1950, UK national debt was £640bn (at 2005 prices) but this was 250% of GDP. So, measuring in terms of GDP depends on what is happening to GDP. E.g. What is the % of the fiscal deficit compared to GDP when the fiscal deficit was £2bn and GDP £100bn in 2000 and then following a recession the deficit was £5bn and GDP = £90bn in 2010?

(f) UK versus other countries? Microeconomics Topic 1: The Economic Problem (f) UK versus other countries? CIA factbook: Greece, Japan, UK and US: 1. 230% of GDP 2. 177% of GDP 21. 89% of GDP 38. 74% of GDP

(f) The size of fiscal deficits and national debts has an impact on: Microeconomics Topic 1: The Economic Problem (f) The size of fiscal deficits and national debts has an impact on: interest rates and debt servicing: a rise in government borrowing should lead to a rise in interest rates, why? BUT this inter-generational equity: increasing deficit and/or debt builds up problems for future generations. BUT

(f) The size of fiscal deficits and national debts has an impact on: Microeconomics Topic 1: The Economic Problem the rate of inflation: if the government borrows money then there is no impact on inflation. If they use QE then inflation arises (remember the inflation monster?!). Between 2008 and 2015, how much has the US Federal Reserve, the Bank of England and the European Central Bank created on QE? BUT the UK and the US have not

(f) The size of fiscal deficits and national debts has an impact on: Microeconomics Topic 1: The Economic Problem (f) The size of fiscal deficits and national debts has an impact on: the country’s credit rating: credit rating are given by firms such as Moody’s or Standard & Poors or Fitch and range from AAA (best) to D. This influences how much a country can borrow and at what rate. France, Germany, Greece, Republic of the Congo, UK, US AAA 100 AAA 97 AA 95 AA 90 CCC 30 CCC 10

(f) The size of fiscal deficits and national debts has an impact on: Microeconomics Topic 1: The Economic Problem (f) The size of fiscal deficits and national debts has an impact on: FDI: countries with large fiscal deficits/debts are likely to see FDI decrease or increase? Why? Ideally a country with a large deficit/debt would like to increase foreign investment. Why?

(f) factors influencing the size of national debts Microeconomics Topic 1: The Economic Problem (f) factors influencing the size of national debts Before the financial ________governments in countries like Spain and Greece had borrowed to __________ their spending. The automatic stabiliser meant that in the recession there was a sharp _________ in tax revenues whilst government spending (on welfare) increased. The governments struggled to pay and were unable to borrow money from the ______________ markets so turned to the IMF and European Central Bank for loans. These were given but with ___________ conditions attached: governments had to ___________spending, ____________ taxes and introduce supply-side reforms. austerity, crisis, cut, fall, finance, financial, raise