Public Sector Finances

Government Spending (Expenditure) - National Debt

The main categories that make up government spending are national defence, social security, health programs and interest payments.

National debt

The national debt refers to the total amount the government has borrowed over time.
The budget deficit refers to how much has been borrowed in a particular year.
- E.g. In 2018, the UK national debt was £1.9 trillion.
- The amount being added to the national debt is the budget deficit (of c.£47 billion).

Problems with national debt

If the markets view the country’s national debt as unsustainable, then demand for government debt will fall. So the cost of borrowing will rise.
High repayments on the national debt (principal and interest) have a significant 'opportunity cost'. This is money which could be spent on health, education, etc.
There is also a question of intergenerational fairness: will future generations have to face increased taxes to pay off the debt being built up now?

Issues to consider with debt

The key measure is national debt as a % of GDP, rather than debt as a raw figure. This is over 100% in some countries.
Key factors to consider when considering whether this is a concern or not are:
- Has the money borrowed gone to current or capital spending (such as spending on infrastructure)? The latter would contribute more to future economic growth.
- What is the rate of interest on the borrowing?

Government Spending - Budget Deficits

The main categories that make up government spending are national defence, social security, health programs and interest payments.

Budget deficits

When a government receives more money in taxes than it spends in a year, it runs a surplus.
When the government spends more money that it receives in a year, it runs a deficit.
If government spending and taxes are equal, it runs a balanced budget.

Cyclical deficits

A cyclical budget deficit is the budget deficit that arises because of the stage of the economic cycle an economy is at, rather than underlying problems.
A key cause is the role of automatic stabilisers:
- In a recession, an economy’s budget deficit rises because unemployed people pay less income tax and consume less, reducing indirect taxes such as VAT. They also receive more welfare payments through housing benefit, income support, etc.
- So, government spending (G) automatically rises and government revenue through taxes (T) automatically falls.

Structural deficits

A structural budget deficit is defined as the part of the budget deficit that still exists when the economy is growing at the trend rate of economic growth.
This could be because of something structurally wrong with the economy - e.g. tax collection systems could be fundamentally weak, tax evasion and avoidance could be high, or there could be an overly generous welfare system.
So a structural budget deficit would be more of a concern for the government.

Crowding in and crowding out

If the government is spending, is it helping the private sector gain confidence to spend (this is known as crowding in).
If, on the other hand, the higher borrowing the government is having to do is creating competition for loans with the private sector, this could lead to higher interest rates for the private sector too. This may put off certain private sector investment (known as financial crowding out), which would dampen any increase in aggregate demand (AD).

Fiscal Policy - Automatic Stabilisers vs Discretionary

Automatic stabilisers are tax and government spending measures that automatically dampen a boom and increase demand in a recession.

Automatic stabilisers

In a recession, more people will become unemployed and corporate profits are likely to fall.
Because of this, a government's income tax and corporation tax receipts will fall.
At the same time, unemployment benefits and welfare payments are likely to increase.
These are automatic stabilisers that increase G (government spending) and decrease T (taxation) in a time of falling demand.
Automatic stabilisers should offset some of the volatility in economic cycles.
In a time of economic growth, more taxes are paid to the government, slowing GDP growth and moderating the economic prosperity.

Discretionary fiscal policy

Discretionary fiscal policy is tax and government spending programmes that affect AD, but are not automatic stabilisers.
A government may increase the VAT rate on consumption from 10% to 30%, but this is independent of the cycle. In 2009, the Labour government cut VAT to try to stimulate demand.
A decision to increase G (government spending) on the NHS, police force or intelligence services would be examples of discretionary fiscal policy.
HS2, which is expected to be a £56bn project, improves the UK's rail infrastructure. This is an example of a discretionary fiscal policy.

1Introduction to Markets

2Market Failure

2.1Market Failure

2.1.1Types of Market Failure

2.1.2Externalities

2.1.3The Deadweight Welfare Loss of Externalities

2.1.4A-A* (AO3/4) - The Externalities of Education

2.1.5Public Goods

2.1.6Information Gaps

2.1.7End of Topic Test - Market Failure

2.1.8Application Questions - Market Failure

2.2Government Intervention

2.2.1Government Intervention in Markets

2.2.2Subsidies & Price Controls

2.2.3Pollution Permits & Regulation

2.2.4A-A* (AO3/4) - European Emissions Trading

2.2.5State Provision & Information Provision

2.2.6Government Failure

2.2.7End of Topic Test - Government Intervention

2.2.8A-A* (AO3/4) - Government Intervention

3The UK Macroeconomy

3.1Measures of Economic Performance

3.1.1Measuring Economic Growth

3.1.2National Income Data

3.1.3Inflation

3.1.4Causes of Inflation

3.1.5Consequences of Inflation

3.1.6Employment & Unemployment

3.1.7Causes & Impact of Unemployment

3.1.8A-A* (AO3/4) - Hysteresis

3.1.9Balance of Payments

3.1.10Current Account Deficit & Imbalances

3.1.11End of Topic Test - Economic Performance

3.1.12Application Questions Macroeconomy

3.2Aggregate Demand

3.2.1Aggregate Demand

3.2.2Consumption

3.2.3Investment

3.2.4Government Expenditure

3.2.5Net Trade

3.2.6End of Topic Test - Aggregated Demand

3.2.7Application Questions - AD

3.3Aggregate Supply

3.3.1Aggregate Supply

3.3.2End of Topic Test - Aggregated Supply

3.3.3A-A* (AO3/4) -Aggregate Supply

3.4National Income

3.4.1National Income

3.4.2Injections & Withdrawals

3.4.3Equilibrium Level of Real National Output

3.4.4Multiplier Effect

3.4.5End of Topic Test - National Income

3.4.6Application Questions - National Income

3.5Economic Growth

3.5.1Causes of Economic Growth

3.5.2Output Gaps

3.5.3Business Cycle

3.5.4Impact of Economic Growth

3.5.5End of Topic Test - Economic Growth

3.5.6A-A* (AO3/4) - Growth

4The UK Economy - Policies

4.1Macroeconomic Objectives & Policies

4.1.1Possible Objectives

4.1.2Demand-Side Policies - Monetary

4.1.3Demand-Side Policies - Monetary 2

4.1.4A-A* (AO3/4) - The Future of Interest Rates

4.1.5Demand-Side Policies - Fiscal

4.1.6Demand-Side Policies in 2007-08

4.1.7Strengths & Weaknesses of Demand Side

4.1.8Supply-Side Policies

4.1.9Supply-Side Policies 2

4.1.10Conflicts Between Objectives

4.1.11A-A* (AO3/4) - Conflicting Incentives

4.1.12Phillips Curve

4.1.13End of Topic Topic - Policies & Objectives

4.1.14Application Questions - UK Policies

5Business Behaviour

5.1Business Growth

5.1.1Size & Types of Firms

5.1.2Business Growth

5.1.3Pros & Cons of External Expansion

5.1.4Demergers

5.1.5End of Topic Test - Business Growth

5.1.6A-A* (AO3/4) - Business Growth

5.2Business Objectives

5.2.1Business Objectives

5.2.2End of Topic Test - Business Objectives

5.2.3Application Questions - Business Objectives

5.3Revenues, Costs & Profits

5.3.1Revenue

5.3.2Costs

5.3.3Economies & Diseconomies of Scale

5.3.4Profits

5.3.5Profits 2

5.3.6End of Topic Test - Revenue, Costs & Profits

5.3.7A-A* (AO3/4) - Revenue, Costs & Profit

6Market Structures

6.1Market Structures

6.1.1Efficiency

6.1.2Perfect Competition

6.1.3Perfect Competition 2

6.1.4Monopolistic Competition

6.1.5Oligopolies

6.1.6The Prisoner's Dilemma

6.1.7Collusion in Oligopolistic Markets

6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?

6.1.9Monopolies

6.1.10Price Discrimination

6.1.11Monopsony

6.1.12A-A* (AO3/4) - Models in Economics

6.1.13Contestability

6.1.14Benefits of Contestability

6.1.15End of Topic Test - Market Structures

6.1.16Application Questions - Market Structures

6.1.17A-A* (AO3/4) - Cereal Collusion

6.2Labour Market

6.2.1Demand for Labour

6.2.2Supply of Labour

6.2.3Labour Market Imperfections

6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment

6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?

6.2.6Wage Determination

6.2.7Elasticity of Labour Supply & Demand

6.2.8Intervention in Setting Wages

6.2.9End of Topic Test - Labour Market

6.2.10A-A* (AO3/4) - Labour Markets

6.3Government Intervention

6.3.1Reasons for Government Intervention

6.3.2Government Promotion of Competition

6.3.3Usefulness of Competition Policy & Examples

6.3.4A-A* (AO3/4) - Modern Competition Policy

6.3.5Privatisation

6.3.6Government Regulation

6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation

6.3.8Government Protection of Suppliers and Employees

6.3.9Impact of Government Intervention

6.3.10End of Topic Test - Government Intervention

6.3.11Application Questions - Government Intervention

7A Global Perspective

8Finance & Inequality

8.1Poverty & Inequality

8.1.1Absolute & Relative Poverty

8.1.2Inequality

8.1.3Inequality 2

8.1.4Lorenz Curve

8.1.5Government Policy on Poverty

8.1.6End of Topic Test - Poverty & Inequality

8.1.7A-A* (AO3/4) - Inequality & Poverty

8.2Emerging & Developing Economies

8.2.1Measures of Development

8.2.2Factors Influencing Growth & Development

8.2.3Barriers to Development

8.2.4Barriers to Development 2

8.2.5A-A* (AO3/4) - The Bottom Billion

8.2.6Development Strategies

8.2.7Interventionist Strategies

8.2.8Aid

8.2.9International Institutions

8.2.10International Institutions 2

8.2.11End of Topic Test - Emerging & Developing

8.2.12Application Questions - Developing Countries

8.3The Financial Sector

8.3.1Role of Financial Markets

8.3.2Market Failure in the Financial Sector

8.3.3Role of Central Banks

8.3.4End of Topic Test - The Financial Sector

8.3.5A-A* (AO3/4) - Financial Sector

8.4Role of the State in the Macroeconomy

8.4.1Public Expenditure

8.4.2Taxation

8.4.3Public Sector Finances

8.4.4End of Topic Test - Role of the State

8.4.5Application Questions - Role of the State

9Examples of Global Policy

9.1International Policies

9.1.1Global Debt & Deficit Policies

9.1.2Poverty & Inequality Policies

9.1.3Changes in Interest Rates

9.1.4Competitiveness Policies

9.1.5End of Topic Test - International Policies

9.1.6A-A* (AO3/4) - International Policies

9.2Policy Responses to Shocks

9.2.1International Tax Policies

9.2.2Problems for Policymakers

9.2.3End of Topic Test - Policy Responses

9.2.4Application Questions - Policy Responses

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