3.5 Fiscal Policy

Question 1

government spending

Answer 1

the total amount of money spent by the government in a given period of time

Question 2

purposes of government spending?

Answer 2

• social protection: aims to provide everyone with a basic minimum standard of living and reduce inequality in the distribution of incomes, e.g. state benefit and universal credit
• health: aims to increase the welfare of the population - ensures everyone has access to health services, regardless of income - NHS
• education: aims to increase welfare of population - ensures everyone has access to education regardless of income - increases equality of opportunity
• defense: spending on armed forces, e.g. army, air force, navy
• law + order: spending on police, courts + prison service
• debt interest: gov has borrowed money, amount outstanding = national debt, and interest has to be paid on this

Question 3

government revenue

Answer 3

source of finance for government spending

Question 4

direct tax

Answer 4

tax on income/wealth, e.g:
- income tax: collects most revenue, income tax allowance and once used up income tax is paid at a rate dependent upon income level
- national insurance contributions: paid by both employees and employers = tax on employing labour
- corporation tax: tax on profits of companies
- inheritance tax: tax on transfer of wealth at time of death
- capital gains tax: tax on profit when an asset is sold for more than it was bought

Question 5

indirect tax

Answer 5

tax on spending (goods and services), e.g:
- value-added tax (VAT) = tax on wide range of g+s (collects 2nd most revenue)
- excise duties = taxes on a specific range of goods
- insurance premium tax
- air passenger duty
- gambling duties

Question 6

balanced government budget

Answer 6

tax revenue = government spending

Question 7

budget surplus

Answer 7

tax revenue > government spending

Question 8

budget deficit

Answer 8

tax revenue < government spending

Question 9

fiscal policy

Answer 9

policy that uses government spending and taxation to affect the economy as a whole

Question 10

how can a budget deficit and surplus be used to achieve economic objectives?

Answer 10

budget deficit - gov spending increases and taxation reduces. this leads to economic growth and low unemployment, by increasing spending, output and employment.

budget surplus - gov spending reduces and taxation increases. this leads to price stability and a healthier balance of payments, by reducing pressure on the price level and reducing spending on imports.

Question 11

how do taxes affect markets and the overall economy?

Answer 11

direct taxes can affect labour markets - workers may feel it is not worth their while to seek higher wage jobs if a large proportion of extra wages