This document discusses fiscal policy and government expenditure. It defines fiscal policy as the manipulation of public spending, taxation, and borrowing to achieve macroeconomic objectives. It outlines the main areas of government expenditure as capital expenditure, current expenditure, and transfer payments. It then explains the concepts of balanced and unbalanced budgets, expansionary and contractionary fiscal policy, cyclical and structural budget deficits, and the public sector net cash requirement. Finally, it discusses the UK fiscal rules around borrowing only to invest and repaying welfare increases during recessions.

1. ECON4
Fiscal Policy & Government
Expenditure
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2. Fiscal Policy
• Manipulation of
– Public Spending
– Taxation
– Borrowing
• To achieve macroeconomic objectives
• Fiscal Policy is going to have impacts on
Individuals and Business
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3. Government Expenditure
• Includes both Central and Local Government
Spending
• Three Main Areas
– Capital Expenditure
• Schools, Hospitals, Roads etc.
– Current Expenditure
• Day to Day running of public services e.g. Pay teachers
– Transfer Payments
• Money transferred from tax payers to benefit
claimants or pensioners etc.
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4. Budget Balance
• ECON2 Recap:
– Main announcements of spending come in the
Budget usually in March, and the Autumn
Statement in October/November.
– Autumn Statement used to be called the Pre
Budget Report
– Budget is delivered to the Commons
– Governments must pass budgets every year
– If a budget fails to pass, the government
crumbles
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5. Budget Balance
Balanced Budget
i.e. Expenditure = Tax Revenue
Balanced Surplus
i.e. Expenditure is less than Tax Revenue
Balanced Deficit
i.e. Expenditure is greater than Tax Revenue
• G = Government Spending
• T = Taxation
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6. UK Budget Balance
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7. Fiscal Stance
“whether the government is seeking to increase
or decrease AD through fiscal policy”
• A neutral fiscal stance is where G=T, so a
balanced budget course is being followed
• A neutral stance should have very little impact
on the economy as a whole.
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8. Expansionary Fiscal Policy
• Sometimes known as Keynesian
Economics
• Governments will run a large budget
deficit and spend on capital projects to
boost AD and general economic activity
• Government may well try and reduce
spending after the economy picks up
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9. Contractionary Fiscal Policy
• This occurs when the government runs a
large surplus in it’s budget.
• G<T
• It can be called deflationary fiscal policy
• It seeks to depress or reduce AD in an
economy.
• Typically it avoids over heating the
economy
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10. G&T Graphs
Govt. Spending falls as GDP rises.
Automatic Stabilisers take effect at this point
Government
Spending &
At Y1 a deficit is being run as GDP is low – Taxation
Taxation
this is called Cyclical Budget Deficit
Balanced Budget G=T
Budget Deficit G>T
Budget Surplus G<T
G
0 Y1 Y2 Y3 Real GDP
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11. Deficits and the Business Cycle
Cyclical Budget Surplus
Cyclical Budget Deficit
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12. Deficits
• With ceteris paribus a deficit will follow
the business cycle with recessions causing
a deficit and a boom causing a surplus in
the budget.
• These are called cyclical budget deficits
and cyclical budget surpluses
• Automatic Stabilisers help to minimise
the changes in the economy during the
cycle
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13. Structural Deficit
• However these occur when the economy
under goes structural changes
– Deindustrialisation
– Rise in benefit claimants as a result of a rise
in single parent families
• This means that a government may run
deficits when they would not typically
have to
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14. PSNCR
• Public Sector Net Cash Requirement
• This is the amount of money required to
cover the difference between
government spending and taxation
• Money often comes from selling Bonds on
the Bond Market
• A Negative PSNCR indicates a budget
surplus and will allow a government to
pay off national debt
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15. Pros and Cons of a Deficit
Problems with a Deficit Benefits of a Deficit
Financing the deficit – interest If spending is used in capital
payments cause a leakage on the expenditure such as infrastructure
circular flow of income and schools it can increase the long
term growth prospects of an economy
Consistent deficits will cause the Avoids a large negative output gap
National Debt to increase
Fiscal Crowding out – Public sector
deficit deters private sector
investment and consumption
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16. UK Fiscal Rules
• Fiscal policy now tends to influence supply side
policies more than anything else
• 1998 – Government establishes the Code for
Fiscal Stability
– GOLDEN RULE: Govt. should only borrow to invest in
new social capital e.g. schools and hospitals
– Any increase in borrowing as a result of increased
welfare payments in a recession must be repaid in a
boom
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17. Useful Links
AS Level Revision Site (ECON1, ECON2)
• http://www.aquinaseconomicsas.co.uk
A2 Level Revision Site (ECON3, ECON4)
• http://www.aquinaseconomicsa2.co.uk
Aquinas Economics on Twitter
• http://www.twitter.com/aquinaseconomic
Aquinas College Economics Department