Discretionary fiscal policy The central government exercises discretionary fiscal policy when it identifies an unemployment or inflation problem E.g. VAT cut to 15% 2008 http://news.bbc.co.uk/1/hi/business/7995850.stm
Automatic stabilisers Automatic stabilizers refer to how fiscal policy instruments will influence the rate of GDP growth and help counter swings in the business cycle.
Automatic stabilisers Automatic stabilizers will help to manage AD and therefore growth/ inflation With higher growth, the government will receive more tax revenues - since people earn more and so pay extra income tax (note the tax rate doesn’t change, the % just becomes higher). With higher growth, there will also be a fall in unemployment so the government will spend less on unemployment and other welfare benefits.
Distinction between a fiscal deficit and the national debt Public sector finances A fiscal deficit occurs when government spending exceeds tax revenue Whereas the national debt is the cumulative total of past government borrowing.
Distinction between structural and cyclical deficits A cyclical fiscal deficit occurs during a downturn in the economy because tax revenues will be falling and government expenditure (for example on social benefits) will be increasing. Such a deficit should disappear when the economy returns to its trend growth rate.
Structural fiscal deficit A structural fiscal deficit remains even when the economy is operating at its full potential. It is, therefore, regarded as a more serious problem than a cyclical deficit. E.g. nationalised industries/ ageing populations/ civil service
Government finances record £9.4bn surplus in January http://www.bbc.co.uk/news/business-39037698
Factors influencing the size of fiscal deficits include the state of the economy the housing market (which influences revenues from stamp duties) political priorities unplanned events
Many countries have experienced a substantial rise in their fiscal deficits since 2008. Assess the factors which might explain this trend in the public finances of a country of your choice.
The size of fiscal deficits and national debts has an impact on: interest rates debt servicing inter-generational equity the country’s credit rating FDI.
25 mARKER In 2012, it was estimated that Japan’s national debt was equal to 214.3% of its GDP, and Greece’s national debt was equal to 161.3% of its GDP. Evaluate the likely impact of measures which a government could take to reduce the economy’s national debt. Refer to a developed economy of your choice in your answer.