3.5 Fiscal policy Flashcards
What is government spending
The total amount of money spent by the government in a given period of time
What things does the government spend on (5)
- Social protection/ benefits
- Healthcare
- Education
- Defence
- Debt interest
What are the sources of government revenue
Taxes
Direct tax
A tax on income or wealth
Government revenue
The source of finance for government spending
Name 3 types of direct taxes
- Income tax
- National insuraance
- Corporation tax
What is an indirect tax
A tax on spending, often defined as a tax on goods and services
Name 3 types of indirect taxes
- VAT
- Excise duties
- Gambling duties
What is a balanced government budget
When tax revenue is equal to government spending
What is a budget defecit
When tax revenue is less than government spending
What is a budget surplus
When tax revenue is more than government spending
Fiscal policy
A policy that uses government spending and taxation to affect the economy as a whole
What economic objectives can fiscal policy be used to control (4)
Economic growth
Low unemployment
Price stability
Balance in the BoP
How can a budget defecit be used to achieve economic objectives
Increased government spending and Reduction in taxes would lead to a rise in demand and output
Overall there will be economic growth and low unemployment
How can a budget surplus be used to achieve economic objectives
Decreased government spending and Increased taxes leads to less demand and less pressure on prices so less inflation. Also less demand for imports so better BoP
How can fiscal policy be used to stimulate economic growth
Low taxes and high government spending
How can fiscal policy be used to stimulate Low unemployment
Low taxes and high government spending
How can fiscal policy be used to stimulate Price stability
High taxes and low government spending means less demand so less pressure on price
How can fiscal policy be used to obtain a balanced balance of payments
Higher taxes and lower government spending means that theres less spending on imports so the BoP gets better
How can direct taxes affect markets
(labour market)
(normal markets)
High income tax and national insurance may decrease supply of labour because they feel that it is not worth working for higher wages
If corporation taxes are decreased, the firms would be able to invest in more efficient technologies so economies of scale so supply increase and prices would decrease
How can indirect taxes affect markets
Quantity demanded of products that have taxes would decrease
How can government spending affect markets with example in building
If the government decides to invest more in sectors like building, the construction industry will benefit and there will be lower unemployment
What is a positive way the government influences markets
They provide subsidies
What are 3 costs of using fiscal policy to budget a defecit (decreased tax increased gov spending)
- The extra disposable incomes of consumers might not be used for demanding items and people could just work less
- Spending on imports may rise which wuld lead to larger BoP defecit
- Inflation could rise if supply cant meet the increased demand
What is 2 examples of opportunity cost for government spending
- If they spend on education to improve LT supply, the healthcare could be neglected
- They have to sometimes have to have a budget defecit or less government spending
Income and wealth redistribution
Government action, using taxation and benefits to reduce inequalities os income and wealth
Progressive tax
A tax that takes a higher percentage from higher incomes
Regressive tax
A tax that takes a higher percentage from lower incomes
What are some consequences of redistribution of income (5)
- If people can live on benefits, they might not even work
- People might be reluctant to work more as they will just be taxed
- Some earners will move abroad to escape taxes, lowering AD
- High direct taxes disincentivise businesses to invest
- People will be reluctant to save if their interest is taxed
