2.6.2 Fiscal Policy Flashcards
What is fiscal policy?
Decisions made by the government on its expenditure, taxation and borrowing to achieve macro economic objectives
What are the 3 types of fiscal policy?
- transfer payments
- current spending
- capital spending
What are transfer payments in fiscal policy?
Spending on the welfare state, benefits and pensions
What is ‘current spending’ in fiscal policy?
Spending on public services, roads and healthcare
What is ‘capital spending’ in fiscal policy?
Spending on infrastructure, roads and equipment for NHS
What is a direct tax?
A tax that is levied upon income, wealth and profits
Give 2 examples of a direct tax?
Income tax and corporation tax
What is an indirect tax?
A tax on spending within an economy
Give 2 examples of an indirect tax?
VAT, excise duties on fuel
Evaluation points for fiscal policy?
- size of the spending
- other factors affect investment
- time lags
- disincentives to work is tax is too high
What is a budget deficit?
The gap between the amount a government spends in a year and the amount the government borrows
What is national debt?
The total amount a govt has to borrow through successive deficits
What are ‘automatic fiscal stabilisers’?
Where the use of fiscal policy can dampen the effects of a boom or recession
Give 2 reasons as to why a budget deficit isn’t a problem?
- govt borrowing can have a powerful effect on AD
- makes sense to borrow if interest rates are low
Give 2 reasons as to why a budget deficit is a problem?
- if it’s too high can generate huge interest payments
- burden has an opportunity cost
