2.5 Fiscal policy and supply side policies Flashcards
Fiscal policy
the use of taxation and government spending to achieve policy objectives
direct tax
a tax which cannot be shifted by the person legally liable to pay the tax onto someone else. They are normally levied on income and wealth.
Income tax
a direct tax levied on personal income
Income tax threshold
the level of income above which people pay income tax
Indirect tax
a tax which can be shifted by the person legally liable to pat the tax onto someone else, for example through raising the price of a good being sold by the taxpayer. They are normally levied on spending
Progressive tax
a tax when, as income rises, a greater proportion of income is paid in taxation
proportional tax
a tax when, as income rises, an equal proportion of income is paid in taxation
regressive tax
a tax when, as income rises, a smaller proportion of income is paid in taxation
wage elasticity of supply of labour
proportionate change in supply of labour following a change in the wage rate
laffer curve
- a curve which shows the levels of tax revenue relative to the income tax rate
- if tax cuts cause incomes to rise (due to incentives) proportionally more than the tax rate has fallen, tax revenues will increase
- if tax increases cause income to fall proportionally more than the tax rate has risen, then tax revenues will decrease
Describe the shape of an individual workers labour supply curve
- workers face an opportunity cost - labour vs. leisure
- an individual has a backward bending supply curve
- at a certain point hourly wage rate will be large enough to cause people to want more leisure hours, since leisure time is a normal good
Why collect taxes? (4)
- to pay for government expenditure
- to correct market failures such as externalities
- to manage the level of spending in the economy
- to redistribute income
policy instrument
a tool or set of tools used to try and achieve a policy objective
Balanced budget
occurs when government spending equals government revenue (G=T)
budget deficit
occurs when government spending exceeds government revenue (G>T)
budget surplus
occurs when government revenue exceeds government spending (G<T)
public sector borrowing
borrowing by the government and other parts of the public sector to finance a budget deficit
national debt
the amount of accumulated debt, resulting from past government borrowing, that is owed by the UK government
multiplier
the relationship between an initial change in aggregate demand and the resulting usually larger change in national income
cyclical unemployment
those unemployed because there is a lack of economic activity in the economy and their labour is not demanded due to the existence of sticky wages (e.g. during a recession)
contractionary policies
policies aimed at reducing aggregate demand
expansionary policies
policies aimed at increasing aggregate demand
Describe expansionary fiscal policy
- budget deficit (G>T)
- lower taxes increases disposable incomes, C↑, AD↑
- increased government spending on services in the economy creates new jobs
How can fiscal policy be used to influence AS?
- The government could reduce income and corporation tax to encourage spending and investment.
- The government could subsidise training or spend more on education. This lowers costs for firms, since they will have to train fewer workers. Spending more on healthcare helps improve the quality of the labour force, and contributes towards higher productivity.
- Governments could spend more on infrastructure, such as improving roads and schools.
