Transcript Topic 4.5.3 Public sector finances student versionx936.39 KB

Role of the state in the macroeconomy: public sector finances
4.5.3 Unit content
Students should be able to:
a) Distinguish between automatic stabilisers and
discretionary fiscal policy
b) Distinguish between a fiscal deficit and the national
debt
c) Distinguish between structural and cyclical deficits
d) Analyse factors influencing the size of fiscal deficits
e) Assess the factors influencing the size of national
debts
f) Evaluate the significance of the size of fiscal deficits
and national debts
(a) introduction
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
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
(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
• What happens during a recession?
(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
(a) multiple choice
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
(a) multiple choice
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
(a) Data response
(a) Data response
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
• What is the difference between a fiscal deficit and the
national debt?
(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
(b) The UK budget and National Debt
Public Sector
Borrowing
% of GDP
Public Sector Net Debt
% of GDP
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
Source: OBR, July 2015
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
(b) Which countries had the highest and lowest gross government
debt (2015)?
(b) UK: net borrowing: comment
(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?
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?
• 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?
20
2.87
Budget balance in billion pounds
0
-0.45
-20
-15.84
-40
-33.17
-60
-54.66
-80
-78.88
-100
-98.33 -101.64
-120
-140
-160
-123.54
-150.76
2010 2011
-128.71
2012
2013
2014
2015* 2016* 2017* 2018* 2019* 2020*
(c) Austerity arguments in favour?
(c) Austerity arguments against?
(d) What factors influence the size of fiscal deficits?
• 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
• 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
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
(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?
• CIA factbook: Greece, Japan, UK and US:
1.
2.
21.
38.
230% of GDP
177% of GDP
89% of GDP
74% of GDP
(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:
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:
• 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:
• 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
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