1. ECON4
Fiscal Policy & Government
Expenditure
Aquinas College Economics Department

2. Fiscal Policy
• Manipulation of
– Public Spending
– Taxation
– Borrowing
• To achieve macroeconomic objectives
• Fiscal Policy is going to have impacts on
Individuals and Business
Aquinas College Economics Department

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.
Aquinas College Economics Department

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
Aquinas College Economics Department

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
Aquinas College Economics Department

6. UK Budget Balance
Aquinas College Economics Department

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.
Aquinas College Economics Department

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
Aquinas College Economics Department

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
Aquinas College Economics Department

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
Aquinas College Economics Department

11. Deficits and the Business Cycle
Cyclical Budget Surplus
Cyclical Budget Deficit
Aquinas College Economics Department

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
Aquinas College Economics Department

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
Aquinas College Economics Department

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
Aquinas College Economics Department

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
Aquinas College Economics Department

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
Aquinas College Economics Department

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