2.5.1 Fiscal policy

Question 1

fiscal policy defintion

Answer 1

use of taxation, government spending and government borrowing to influence the economy.

Question 2

demand side fiscal policy definition

Answer 2

fiscal policies that aim to manipulate aggregate demand (AD) to achieve the macroeconomic objectives

Question 3

supply side fiscal policy

Answer 3

fiscal policies that aim to improve the supply-side of the economy

Question 4

direct tax

Answer 4

a tax on income/wealth
e.g. income tax, corporation tax, capital gains tax

Question 5

indirect tax

Answer 5

a tax on spending
e.g. VAT, excise duties

Question 6

Fiscal policy to influence microeconomics

Answer 6

intended to change the pattern of econ activity.
e.g. subsidies to encourage C, indirect tax to discourage C of CERTAIN products

Question 7

fiscal policy + AD

expansionary fiscal policy

Answer 7

either increases in gov spending or reductions in tax - shift AD to the right.

Question 8

fiscal policy + AD

contractionary fiscal policy

Answer 8

tax rises/ public spending cuts - shifts AD left

Question 9

fiscal policy + AD

what directly effects AD (to do with fiscal policy)

Answer 9

government spending - its a component of it.

Question 10

What economic indicators do changes in AD effect?

Answer 10

• level of real GDP
• level of unemployment
• price level
  changes in gov spending = cause mutliplier

Question 11

fiscal policy + AS

effects of changes in indirect tax

Answer 11

• increases = shift SRAS left
• reductions = shift SRAS right
  because higher indirect taxes cannot always be fully passed onto the consumer in forms of higher prices, so profit margins fall.
  ∴ reduces incentive to supply output at any given price level

Question 12

supply-side foscal policy defintion

Answer 12

fiscal policies designed to imrpove the LRAS of economy.

Question 13

examples of supply side fiscal policy:

Answer 13

• targetted gov spending on increasing econs production capacity.
• tax incentives to firms to encourage employment of workers.
• reducing direct tax - work more attractive

Question 14

fiscal stance definition

Answer 14

extent to which fiscal policy is likely to add or subtract from AD

Question 15

fiscal stance affects:

Answer 15

affects budget balance -
expansionary = closer to deficit
contractionary = closer to surplus

Question 16

public expenditure

resource (CURRENT) spending defintion

Answer 16

spending on day to day items e.g. salaries for employees of public sector.

Question 17

capital spending defintion

Answer 17

spending on investment e.g. new hospitals, schools, roads

Question 18

public expenditure

what does dividing into capital and current expenditure to?

Answer 18

allows us to see which spending will boost LRAS

Question 19

public expenditure

what is the amount spent refered to as?

Answer 19

total managed expenditure (TME)

Question 20

public expenditure

what is Total Managed Expenditure (TME) divided into?

Answer 20

1. gov departments given amount they can spend Departmental Expenditure Limits (DEL)
2. spending not controlled by such e.g. welfare, pensions Annual Managed Expenditure (AME)

Question 21

public expenditure

major areas of public expenditure?

Answer 21

• public goods provision e.g. roads, defence
• merit goods provison e.g. health, education
• welfare expenditure e.g. prevent poverty
• debt interest

Question 22

principles of taxation: (6)

Answer 22

• economical - inexpensive to collect
• equitable - fair
• efficient - few harmful side effects
• convinient - easy to pay
• certain - shoudl be able to work out how much
• flexible - changeable to different circumstances

Question 23

reasons why govs levy taxes (4)

Answer 23

• raise revenue to finace gov expenditure
• change patterns of econ activity - cause shift away from one product to another
• discourage consumption + production of certain goods
• distribute income - gap between rich and poor narrowed

Question 24

hypothecated tax

Answer 24

= tax levied to raise money for specific purpose
* on negative externalities could deal w/ problems caused by them to society
* restricts govs ability to use revenue as it chooses, limits flexability towards financing spending

Question 25

progressive tax

Answer 25

= higher incomes - higher tax * achieved through tax bands, tax only paided on additional income earned.

Question 26

regressive tax

Answer 26

= taxes that increase in relative size on lower income earners e.g. community charge - every person paid same amount, reguardless of income, contraversial and changed, hits poor harder

Question 27

proportional tax

Answer 27

= taxes that are paid in equal proportions by everyone one rate of tax and no tax-free thresholds

Question 28

income tax advantages

Answer 28

* fair - based on earnings * progressive nature - alleviate relative poverty * administered by employers for most workers

Question 29

income tax disadvantages

Answer 29

* disincentive to work * progressive system - complex and expensive t administer * encourages tax avoidence

Question 30

VAT advantages

Answer 30

* Does not affect work incentives * Hard to avoid

Question 31

VAT disadvantages

Answer 31

* Regressive in many cases * Changes in VAT rate can be inflationary

Question 32

Excise duties advantages

Answer 32

* Can change patterns of expenditure (e.g. different rates used for petrol and diesel) * discourage consumption of demerit goods

Question 33

Excise duties disadvantages

Answer 33

* May lead to unemployment in those industries * Regressive in some cases * Can lead to 'black markets where consumers get the product through alternative means to avoid the tax

Question 34

council tax advantages

Answer 34

* Seen as fair as based on wealth of household * Raises money for local services

Question 35

council tax disadvantages

Answer 35

* Poverty values used to set 'bands' are very out of date * Those who are 'asset rich and cash poor' may find it difficult to pay

Question 36

corporation tax advantages

Answer 36

Based on success of companies - I.e. does not hit less successful companies as hard

Question 37

corporation tax disadvantages

Answer 37

* May deter foreign direct investment * Encourages tax avoidance * May discourage business investment

Question 38

cyclical budget deficit

Answer 38

* portion of a budget deficit that changes when rate of economic growth changes. * Over time, cyclical deficit = eliminated as economic growth rate recovers towards its long-run average rate (and would move into a cyclical budget surplus if the economy were growing at an above-average rate).

Question 39

structrual budget deficit

Answer 39

portion of budget deficit that remains even if econ growth is at normal long-run rat - means any structural deficit won't be eliminated after a period of time. - only eliminated if contractionary fiscal is implimented.

Question 40

# concequences of budget deficits and surpluses economic growth

Answer 40

* Budget deficit: Fiscal policy adds to AD * Budget surplus: Fiscal policy subtracts from AD * Impact on growth: Changes in AD affect SR economic growth * Economic growth rate affects budgetary position * Slower growth leads to higher welfare expenditure and lower tax revenue. * Low economic growth might lead to a budget deficit

Question 41

# concequences of budget deficits and surpluses unemployment

Answer 41

* Higher government spending and larger budget deficit may increase demand for workers. * ST effect: Greater demand for workers due to increased government spending * LT perspective: Some economists argue unemployment returns to natural rate independent of budgetary policy

Question 42

# concequences of budget deficits and surpluses inflation

Answer 42

* Demand-pull inflation: Result of excessive AD * Expansionary fiscal policy may contribute to excessive demand * Budget surplus effect: Rise in budget surplus (via tax increases and government spending cuts) reduces demand-pull inflation

Question 43

# fiscal policy and national debt What does the government do when it runs a budget deficit?

Answer 43

* gov borrows to cover deficits, forming part of the national debt. * Bonds issued to finance the deficit eventually need repayment, but deficits occur more frequently than surpluses, leading to continuous accumulation of debt.

Question 44

# fiscal policy and national debt How does the size of the national debt affect interest payments?

Answer 44

The size of the national debt, expressed as a percentage of national income, influences the amount spent on interest payments.

Question 45

# fiscal policy and national debt why do govs tend to run deficits + political impications?

Answer 45

* govs run deficits due to popular support for government spending among voters, reluctance of politicians to promise tax increases, and less immediate concerns about future debt repayment for politicians seeking election.

Question 46

# significance of national debt What does large debt require?

Answer 46

* greater interest to be paids on the debt * requires gov to make choces as to how to finace the payments

Question 47

Office for Budget Responsibility (OBR)

Answer 47

set up 201- to provide independent analysis of fiscal policy

Question 48

Main functions of OBR

Answer 48

1. Economic forecasting - especially focusing on forecasts of the government's finances. 2. Evaluating fiscal policy (against the government's own previously set targets). 3. Analysis of the sustainability of public finances. 4. Evaluation of fiscal risks. 5. Analysis of tax and welfare costing.