18) Demand Management(1) FISCAL POLICY Flashcards
Who is the Chancellor of exchequer, and what is he in charge of
- George Osborne
- In charge of government fiscal policy
What does Fiscal Policy mean
The uses of taxes and government spending to manipulate the level of aggregate demand in the economy
What is budget day
- spending and taxation plans are announced
- by the chancellor
- in March
What is autumn statement
- further announcement by the chancellor
- in November
What are the four main categories of public (government) spending in the uk
- current expenditure
- capital expenditure
- transfer payments
- debt interest
What is current expenditure
- definition
- give example
- where is it recorded in the AD
- Spending on the day to day running of public services
- teachers and nurses pay
-recorded in C components on AD
> its households who put money into the circular
flow
> by spending their income
What is capital expenditure
- give definition
- example
- what component is it recorded in the AD
- investment for the future
- building a new hospital, school and road
-recorded in the G components of AD
-in long run can shit AS to the right
> increase of the factors if production
What is transfer payments
- definition
- examples
- what component is it in the AD
- payments made by governments to the individuals
- pensions, tax credits, benefits
-recorded in C components of AD
>it is households who put the money into the
circular flow, by spending their benefits
What is debt interest
- definition
- example
- Payments to the holders of government debts
- bond holders
What are:
- income tax
- national insurance contribution
- direct taxes
- deducted directly from wages
Whats is corporation tax
Paid by firms as a % of their profits
What are:
- capital gains tax
- inheritance tax
- stamp duty
- capital taxes
- apply to the assets you require and sell
What are: -value added tax -tobacco duty -alcohol duty -petrol duty -environmental taxes >aggregate levy >climate change levy >landfill tax
- indirect taxes
- applied to expenditure
-environmental taxes are a used to discourage activity that causes harm to the environment
What is an expansionary fiscal policy
- to increase AD
- to promote economic growth and lower unemployment
How can expansionary fiscal policy be done
- increase in the government spending, increases the level of injection in the circular flow
- decreasing taxation reduces the level of leakages from the circular flow
What is contractionary fiscal policy
- to reduce the AD
- by reducing level or inflation, or reducing level of government devt
How can contractionary fiscal policy be done
- decreasing the government spending, to reduce injection into circular flow
- increasing taxation, to increase leakages from circular flow
How can a cut in income tax rate be described as an expansionary fiscal policy
- reduces income tax bill
- increases income after tax has been deducted
- creates an injection of consumer spending
- increase in AD shifting to the right
- increases real GDP
How can an increase in cooperation tax rate be described as a contractionary fiscal policy
- increase the tax taken from business profits
- reduce the amount of profits left after tax
- reduce amount if business investment
- decrease AD shifting to the left
- reducing real GDP
What is a budget/fiscal deficit
When government spending is greater than tax revenue
Give in example of when the UK was in budget/fiscal deficit, and explain why this happened
>2011-12
>-£122billions
>occurred because government borrowed money
through the issue of bonds
>had to pay interests on itWhat is the impact of a budget deficit on AD
A budget/fiscal deficit:
- increases AD
- increases real GDP
- increases inflation
What is the impact of budget deficit on injection/leakages in the circular flow
Government spending is an injection into the circular flow whereas the taxation is a leakage
-if the injection (G) is greater than leakage (T)
>AD will increase
-if tax is greater that government spending
>budget surplus
> decrease in AD
What are the advantages of fiscal policy
- has a big impact on AD
- can influence behaviour
- can have supply-side effects on the long run
- meet environmental goals
- reduce income inequalities
How does fiscal policy cause a big impact on AD
-causes multiplier effect
-the multiplier is when an initial injection into the circular flow leads to a proportionally increase in AD and GDP. This is a positive multiplier effect
-an example is a cut in the income tax
>reduces income tax bills
>increases income after tax has been deducted
>creates injection in consumer spending
>causes a shift in AD to the right
>increases real GDP
How can fiscal policy be used to influence behaviour
-government uses working tax credits to encourage people to work
How can fiscal policy effect supply-side policy in the long run
-increase spending on education
-increases AD in the short run
-increases AS in the long run
>better educated individual are more productive
>more can be produced at the same level of
resources
How can fiscal policy meet environmental goals
Carbon taxes reduces CO2 emissions
How can fiscal policy reduce income inequalities
- rich pay more income tax to the government
- re-distributed in the form of benefits and spending on the poorer section of the society
- a tax that takes larger % of income from the rich is called progressive
What are the limitation of the fiscall policy
- budget deficit
- can have immediate impact but long time to implement
- only decided twice yearly
- some fiscal policy measure have disincentive effect
- increase government spending can crowd out private investment
- government failure
Why is the budget deficit a limitation for fiscal policy
increasing government spending can lead to budget deficit
⚫️ means government have to borrow to fund its spending, borrowing means:
➡️government spending will be cut back in future, to pay back the debt
➡️national debt increases
➡️interest payments will have to be paid on this debt
➡️tax rise in future, to repay debt causing C and I to fall
Explain how having an immediate impact but taking long to implement is a limitation for fiscal policy
➡️e.g
➡️budget has to be presented to parliament
➡️passed through majority vote
➡️government with weak majority vote
➡️could find it difficult to pass the budget
Explain how deciding twice yearly is a limitation for fiscal policy
⚫️chancellor of the exchequer publishes the governments taxation and spending plans
➡️on budget day
➡️autumn statements
Explain how some fiscal policy measuring can have a disincentive effect can cause a limitation of fiscal policy
⚫️if increase in income tax ➡️some people decide to work less ➡️reducing the amount of ➡️labour willing to work ➡️and quantity of the factors of production
Why is an increased government spending crowding out private investment a limitation of fiscal policy
⚫️use of builders to build large government funded schemes
➡️mean fewer builders available to build private houses
➡️lead to misallocation of resource
➡️as private sectors usually more productive than public sectors
Explain why government failure is a limitation of fiscal policy
⚫️government failure can lead to
➡️making things worse
➡️creating a misallocation of resources
⚫forexample
➡️subsidies paid to farmers
➡️resulted in the overproduction of food
