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Public sector finances

Public sector finances 

Automatic stabilisers are policies designed to immediately offset fluctuations in the economy and work to stabilise the economy before any intervention by the government/policy makers. 
e.g in a recession as unemployment increases, the government is automatically spending more in unemployment benefits due to JSA already being in place

Discretionary fiscal policy is when the government makes deliberate changes to spending, tax rates or borrowing in order to boost aggregate demand. 

The fiscal deficit is the amount that government expenditure exceeds the revenue the brings in. Occur when tax revenues aren't enough to fund spending so the government must borrow. 

The national debt is the total amount that the government owes to its creditors. This is the total level of debt accumulated over previous years to help finance spending. 

A structural deficit exists at any point in the business cycle (due to the difference in government expenditure and tax revenue), whereas a cyclical deficit exists based on where the economy is in its business cycle. In a boom the deficit should shrink (or even become a surplus) and vice versa in a recession. 

Factors influencing the size of the deficit: 
  • Level of tax avoidance/evasion - greater levels of this decrease the amount of revenue the government collects and increases the deficit. 
  • Level of income/wealth inequality - Inequality leads to the richer attempting tax avoidance and the poorer not having enough money to contribute much or any tax revenue (when progressive taxation is in place).
  • Demographics - affects the level of government spending required (an ageing population will require more spending in healthcare than a younger one) and the level of tax collected 
  • Government efficiency - if the government isn't efficient in providing services then there will be less value for money and spending will have to increase to cover what is needed. 
  • Level of subsidies/financial support - more subsidies require more government spending. 
Government often sells bonds to raise money for government spending. This can lead to crowding out. So if there's a large deficit more likely chance of crowding out. 
If debt is too high people may be unwilling to lend to a country as they lose confidence in the ability of that country to pay the money back. They will demand higher interest rates (rates of return) to compensate for the increased risk which dampens economic growth. 
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