T4 - The role of state in the macroeconomy

Fiscal policy features

automatic stabilisers

discretionary fiscal policy

Types of fiscal deficit

cyclical

structural

3 types of public expenditure

current

capital

transfer payments

Reasons for changing the size of public expenditure

reducing inequality

changing incomes

level of GDP

political priorities

demographics

discretionary fiscal policy and external shocks

Crowding in

an increase in govt spending and investment leads to an overall expansion in economic activity

Impact of public spending

increase in national debt

taxation

equality

The ricardian equivalence

expansionary fiscal policy, causes rational consumers and businesses to cut their spending in response to debt financied government policy

as they believe govts will raise taxes in long run to pay additional debt interest payments

The laffer curve

supposed relationship between economic activity and the rate of taxation which suggests there migth be an optimum or ceiling tax rate which maximises total tax revenue

Factors influencing the size of national debts

the size of fiscal deficits

national debt is cumulative total of past years of government borrowing

Fiscal drag

where inflation and earning growth may push or drag more taxpayers into higher tax brackets

Cyclical fiscal balance

size of the fiscal deficit is influenced by the state of the economy

Structural fiscal balance

part of the deficit which is not related to the state of the economy

Austerity

name used for government fiscal policy which is aimed at reducing a government’s deficit

Factors that would increase the size of fiscal deficit

economic cycle

housing market

political priorities

debt interest

ageing populations and ‘care crisis’