Fiscal Policy

Fiscal Policy: what affects the size of government spending, large budget defcits, budget surplus.

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  • Fiscal Policy
    • The Size of Gov Spending can be affected by:
      • The size and structure of an country's population.
        • Bigger population = more gov spending.
      • A gov's policies on inequality, poverty and the redistribution of income.
        • E.g. a gov that wants to redistribute income may want to spend more on benefits.
      • Fiscal Policies used to tackle certain problems.
        • E.g. during a recession a gov may want to increase public spending to encourage growth and reduce the amount of people unemployed, but this could lead to a large national debt so they may reduce their spending.
    • Large Budget Deficit
      • A budget deficit must be paid by public sector borrowing - so that the gov can spend more money than it receives in revenue.
      • Occurs when gov spending exceeds tax revenue.
        • Solved by increasing taxes or decreasing gov spending.
      • Money could be borrowed from banks; but there are problems if the borrowing is excessive:
        • It could create demand-pull inflation - as gov borrowing increases the money supply - so there's more money in the economy than can be matched by output.
        • It could create inflation, it could also lead to a rise in interest rates to curb that inflation. Higher interest rates will discourage investment by firms and the country's currency will rise in value - so its exports are less price competitive.
      • Cyclical Budget Deficit - caused by a recession and comes about due to a gov's automatic stabilizers (gov spending on benefits rises and tax falls) - this deficit will be corrected once the economy recovers again.
    • Budget Surplus
      • Might suggest taxes are too high or that gov's aren't spending enough on the economy.
      • Would be corrected by increasing gov spending or lowering taxes.

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