Economics Theme 4 Plc 1: The Budget/national Debt & Governemt Policy In A Globalised World

Front 1

Define Automatic Stabilisers

Back 1

Fiscal policies that are automatically triggered when the level of economic growth changes.

Government spending rises in a slump owing to increased benefit payments and taxation falls as fewer people work and spend (vice versa for a boom)

These changes in AD will help to reduce fluctuations away from the trend rate of growth.

Front 2

Define Discretionary Fiscal Policy

Back 2

When the government makes a conscious choice to change policies.

Front 3

Define Fiscal Deficit

Back 3

This occurs when government spending exceeds tax revenue

Front 4

Define National Debt

Back 4

The cumulative of total past borrowing.

E.g. If

Budget Deficit Year 1=£10bn

Budget Deficit Year 2=£15bn

National Debt = £25bn

Front 5

Define Cyclical Deficit

Back 5

This 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.

Front 6

Define Structural Deficit

Back 6

This remains even when the economy is operating at its full potential. Regarded as a more serious problem than a cyclical deficit.

Front 7

What are 5 reasons that some countries have large fiscal deficits?

Back 7

Cyclical Reasons

Demographic Pressures

Government Inefficiencies

High Levels of State Support

Tax Avoidance + Tax Evasion

Front 8

Explain how cyclical reasonsl can cause a country to have large fiscal deficits?

Back 8

Downturns can lead to increase in government spending and lower taxation revenue from automatic stabilisers

A large recession such as the global financial crises may require a fiscal stimulus to reduce negative animal spirits.

Front 9

Explain how demographic pressures can cause a country to have large fiscal deficits

Back 9

High costs of social care and health for an elderly population cause higher government spending

Front 10

Explain how Government Inefficiency can cause a country to have large fiscal deficits

Back 10

High levels of inefficiency will mean more funds are required

Front 11

Explain how High levels of state support can cause a country to have large fiscal deficits?

Back 11

Subsidy schemes like Common Agricultural Policy are expensive to maintain

Front 12

Explain how Tax Avoidance and Tax Evidence can cause a country to have large fiscal deficits?

Back 12

Tax Avoidance is legal actions taken by an entity to reduce the amount of tax they have to pay.

E.g. Employing a partner in a company so both personal allowances can be used.

Tax Evasion is the illegal non-payment of tax.

E.g. You are sent a council tax bill and you do not pay it.

Front 13

Give 5 reasons why fiscal deficits and national debt matter

Back 13

Inter generational opportunity costs

Crowding Out

Inflation

Future Borrowing (Credit Rating)

Attracting FDI

Front 14

What is meant by Intergenerational Opportunity Costs?

Back 14

Budget deficits created by the current generation will have to be paid off by budget surpluses from future generations.

Front 15

How is Future Borrowing (Credit Rating) affected by fiscal and national debt?

Back 15

A large national debt makes it harder to borrow additional funds and might lead to a downgrading of a country’s credit rating, causing the interest rate on borrowing to increase.

Front 16

How is FDI attraction affected by fiscal deficits and national debt?

Back 16

MNC’s are attracted by stability and high national debts are more likely to lead to financial problems.

Front 17

Give 5 reasons why a country may not be actively trying to reduce its national debt

Back 17

Self-Defeating Austerity

Capital Expenditure

Cyclical Deficits

Size of debt as a % of GDP

High Economic Growth

Front 18

How does Self-Defeating Austerity explain why a country may not be trying to reduce its national debt?

Back 18

Austerity measures such as cutting government spending can create negative multiplier effects leading to lower economic growth and less tax revenue.

Front 19

How does Captial Expenditure explain why a country may not be trying to reduce its national debt?

Back 19

If the government borrows to invest then it will make the country richer in the long run.

Front 20

How do Cyclical Deficits explain why a country may not be trying to reduce its national debt?

Back 20

Cyclical Deficits should be eliminated when the economy move into a boom.

Front 21

How does Size of debt as a % of GDP explain why a country may not be trying to reduce its national debt?

Back 21

If the debt is a low % of GDP then it should not be concerning.

Front 22

How does High Economic Growth explain why a country may not be trying to reduce its national debt?

Back 22

If a country’s a GDP is growing faster than the national debt is rising then they should be able to pay it off.

Front 23

Give 5 policies the government can use to reduce national debt

Back 23

Lower Government Spending

Higher Taxation

Privatisation

Reduce Real Value of Debt

Default

Front 24

Explain how lower government spending would work to reduce national debt then evaluate it

Back 24

Should lead to budget surplus.

May lead to less inefficiency, government failure and could also reduce crowding out.

EVAL:

investment in supply side policies are needed for long run growth.

Likely to increase inequality

Makes up 23% of AD, so is a key part of it.

Front 25

Explain how Higher Taxation would work to reduce national debt then evaluate it

Back 25

Should lead to higher tax receipts which could be used to pay off debt.

EVAL:

Laffer Curve

Capital Flight (when people assets/money flow out of a country)

Higher Indirect Taxes are recessive

Higher Indirect Taxes increase black market

Front 26

Explain how privatisation would work to reduce national debt then evaluate it

Back 26

State assets are sold to the private sector to generate income

EVAL:

One off policy

Need for regulation to ensure consumers aren’t cheated

Front 27

Explain how Reducing Real Value of Debt would work to reduce national debt then evaluate it

Back 27

Inflationary policies such as QE will cause debt to be worth less in real terms

EVAL:

Lower standards of living for citizens

Lower trustworthiness of country

Front 28

Explain how Defaulting would work to reduce national debt then evaluate it

Back 28

Just wouldn’t pay them back.

EVAL:

People won’t lend to them again

Find it hard to borrow in the future

Have a higher rate of interest

Main people who invest in UK government are it’s citizens. Would be hurting your own population

Front 29

What are external shocks and some examples?

Back 29

“When America sneezes the rest of the world catches a cold”

This is when individual counties can be affected by shocks that occur in other countries.

These can include:

Spikes in commodity prices (e.g. oil, crops)

A financial crisis

Policial or economic problems in major trading partners

(Wall Street Crash, Great Depression)

Front 30

What policies can be used to respond to external shocks?

Back 30

Expansionary fiscal stimulus

Expansionary monetary policy

Front 31

What polices can a government use to control the behaviour of MNC’s?

Back 31

Limits on Transfer Pricing

Regulations

Front 32

Explain what Limits on Transfer Pricing means

Back 32

Refers to MNCs moving products between different subsidiaries they own.

With corporate tax rates varying considerably from country to country, there is potential for global companies to reduce their global tax charge by manipulating the prices charged on their intra group transactions.

Front 33

What kind of regulations may a government enforce on MNCs to control them?

Back 33

Insist that they use local labour or supplies

Insist that they set up a joint venture with a local firm.

Front 34

What can occur when multiple government attempt to attract MNCs?

Back 34

A “race to the bottom” to have the most business friendly environment (low tax and little regulations)

Front 35

What problems do policy makers face when making decisions?

Back 35

Inaccurate Information

Risks and uncertainties

Inability to control external shocks

Front 36

Define Discretionary Fiscal Policy

Back 36

When the government makes a conscious choice to change policies.

Front 37

Define Discretionary Fiscal Policy

Back 37

When the government makes a conscious choice to change policies.