The Government And The Economy - Fiscal Policy

Fiscal Policy

is defined as any action taken by the government which affects the size or composition of government revenue and expenditure.

Deficit, Surplus and Neutral Budgets

The term budget deficit refers to the current budget. There is never a deficit in the capital budget.

A (current) budget deficit: is when government expenditure exceeds government revenue.

A budget deficit will have an inflationary effect on the economy.

A current budget surplus: is when government current revenue exceeds government current expenditure.

A balanced budget: is when government current revenue is equal to government current expenditure.

A neutral budget: is when the overall effect of the budget is neither inflationary nor deflationary.

The National Debt


The National Debt: is the total amount of money borrowed by the government which is still outstanding.

Domestic Debt: is that part of the national debt which is owed to Irish individuals and Irish financial institutions.

Foreign Debt: is that part of the national debt which is owed to individuals and financial institutions outside the country.

National Treasury Management Agency (NTMA): was founded in 1990 to borrow money for the exchequer and to manage national debt for the Department of Finance.

In 2001 its functions widened to include management of the National Pensions Reserve Fund.

Is the National Debt a Burden?

1. Self-Liquidating Projects
These are projects which will increase the future productive capacity of the country.
Money spent on such projects does not constitute a burden.
Deadweight debt: is borrowed money spent on loss-making projects or on items which yield little long-term benefit to the country.
Deadweight debt does constitute a burden to the state.

2. Infrastructure
Productive infrastructure: refers to state investment in those things which will
directly increase output.
E.g., roads, airports, etc.
Such expenditure is self-liquidating since better infrastructure will increase the profitability of fi rms, resulting in increased tax revenue to the state.
Social infrastructure: refers to the provision of services such as health, education, housing, etc.
Such expenditure is not self-liquidating directly, since no additional tax revenue accrues to the state. However, there is indirect benefit, since social infrastructure improves the productive capacity of workers.

3. Private Sector Borrowing
If the government borrows funds which are not required by the private sector, then this does not represent a burden.
However, if the government borrows funds which could have been put to better use
by the private sector, then this does constitute a burden on the state.

4. Interest
The greater the amount of national debt which is borrowed from abroad, the greater the fi nancial burden on the government.
In the case of domestic borrowing, any interest received by Irish individuals or institutions is liable to taxation as it is classed as income. In this way, the government can recoup a portion of the interest payments.

5. Borrowing for Current Purposes
Borrowing for current purposes represents the most serious form of deadweight debt.
It is the problem which has blighted Ireland for the past number of years.
Borrowing for current purposes does not always represent a burden. If such borrowing is undertaken to stimulate an economic recovery by increasing economic demand, then it is worthwhile. Note, however, that all such borrowing allows current consumption to be increased at the expense of future consumption.

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