Fiscal Policy Background

Fiscal variables relate to government spending and taxation. Governments in most circumstances can directly (through varying their own spending) or indirectly (through varying taxation) influence the level of total spending in the economy. This is especially likely to be the case when interest rates have become very low and conventional monetary policy cannot be used to stimulate an economy.

But such policies have implications for government deficits and government debt. If their expenditure exceeds their tax revenue then governments will generally fill the gap, the government’s budget deficit, by selling claims against itself – interest-bearing government bonds. The accumulated stock of such debt is the government’s outstanding debt, the national debt, i.e. the accumulated value of the bonds it has issued to finance past deficits.

Data on deficits and debt can be presented in nominal terms, in real terms or as a percentage of a country’s GDP. In nominal terms they show the amount of units of domestic currency – £s in the UK’s case – that the deficit or national debt is equivalent to. In real terms, i.e. at prices in some arbitrarily chosen base year, they show the volume of real goods and services in that year to which the two variables are equivalent. As a percentage of the country’s GDP the data give an indication of the scale of the two variables. This last measure is useful for comparing the situation in different countries and for gauging the sustainability of the country’s fiscal position. The graph shows the UK’s Debt presented as a percentage of GDP since 1830. The huge rises in 1914-18 and 1939-45 are of course due to the borrowing required to finance the 1st and 2nd World Wars