3.5 Fiscal policy Flashcards
What does the term ‘government spending’ mean?
The total amount of money spent by the government in a given period of time.
What does the government spend their money on?
- Social protection (pension and welfare)
- Healthcare
- Education
- Defence
- Law and order
- Debt interest
What does the term ‘government revenue’ mean?
The source of finance for government spending (from taxes).
What does the term ‘direct tax’ mean and examples?
A tax on income or wealth, e.g.
- Income tax
- Nation insurance contributions (NICs)
- Corporation tax
- Inheritance tax
- Capital gains tax
What does the term ‘indirect tax’ mean?
A tax on spending often defined as a tax on goods and services, e.g.
- Value-added tax (VAT)
- Excise duties
- Insurance premium tax
- Air passenger duty
- Gambling duties
What does the term ‘local tax’ mean?
There are two direct taxes in the UK from which the revenue go to local authorities (council), e.g.
- Council tax (on the value of an occupier’s house)
- Business tax (value of property owned by businesses)
What does the term ‘balanced government budget’ mean?
When government’s revenue is equal to its expenditure/ spending.
What does the term ‘budget deficit’ mean?
When government expenditure is greater than its revenue.
What does the term ‘budget surplus’ mean?
When government’s revenue is greater than its expenditure.
What does the term ‘fiscal policy’ mean?
A policy that uses taxation and government spending to affect the economy as a whole.
How can a budget deficit be used to achieve economic objectives?
Economic growth and low unemployment. An increase in government spending or reduction in taxes means that there is more disposable income and so consumer spending is increased and total demand rises acting as income for the firm to produce more output resulting in economic growth and derived demand for worker ensue to match this demand increasing employment.
How can a budget deficit be used to achieve economic objectives?
Less inflation and a reduced balance of payments. An decrease in government spending or increase in taxes means that there is less disposable income and so consumer spending will fall and total demand also fall. The decrease in income for the firm forces less output to be produced and derived demand for worker is less so pressures on prices are less and demand for imports fall.
What does the term ‘income and wealth redistribution’ mean?
Government action, using mainly taxation and benefits, to reduce inequalities of income and wealth.
What does the term ‘progressive tax’ mean?
A tax which takes a greater percentage of tax the higher the income, e.g. income tax (income) and inheritance tax (wealth).
What does the term ‘proportional tax’ mean?
A tax which takes a constant proportion of tax the higher the income.
What does the term ‘regressive tax’ mean?
A tax which takes a lesser percentage of tax the higher the income, e.g. VAT.
What are the consequences of redistribution methods?
- Over reliance on benefits (disincentive to work)
- High earners move abroad to escape tax (tax exiles & brain drain)
- High direct tax discourages firms investing
- Saving falls due to high direct tax on interest
- More illegal tax evasion
- Capacity to produce goods and services fall with lack of workers
