4.2.5.1 - Fiscal Policy And Taxation Flashcards
What is fiscal policy
The manipulation of government spending, taxation and borrowing to influence the economy
What are the fiscal policy goals
- keep inflation on target 2% (BofE control this however shifts in ad/as can have an affect too)
- stimulate economic growth whilst continuing to maintain a stable economic cycle
- tackle market failure
- provide a welfare state
- improve competitiveness
- redistribute income and wealth (lower inequality)
What effects the impact of policies
The size of the taxation/ gov spend
Who is affected by it
What is an expansionary policy
Designed to boost ad/as
- cutting taxes
- raising gov spending
- increasing borrowing
What is a contractionary policy
Designed to reduce ad/as
- increasing taxes
- cutting gov spending
- reduce borrowing
What are automatic stabilisers
Change in tax revenues and gov spending that one about automatically as the economy moves through the business cycle
Eg:
- when the economy is booming, gov revenue should automatically increase
- when the economy increases, gov spending should decrease
What are discretionary changes
**deliberate ** changes in taxation and gov spending eg: capital spending
What is indirect taxation
Taxed placed on goods that the firms have to pay, usually resulting on firms pushing this cost onto the consumers
Eg:
- VAT
- ad valorem tax
- excise duties
What is direct taxation
Tax that’s applied directly onto the income,wealth or profit of individuals or firms
Eg:
- income tax
- inheritance tax
- capital gains tax
- corporation tax
- national insurance
What are the income tax bands
personal allowance (12,570) = **0%
basic rate (12,570 -50,270) = 20%
higher rate (S0,270-125,190) = 40%.
additional rate (125,190 +) = 45%.
What is the value of inheritance tax
40% tax on anything above £325,000
What is affected by capital gains tax and what are the values
Affects second properties, shares, business sale, valuables
-> the rates differ between areas
What is the corporation tax rate
- 19% tax on businesses whose profit is below 50,000
- 25% tax on businesses whose profit is over 250,000
- Business with profit between 50,000 and 250,000 are able to claim marginal relief
What is national insurance used for
Payed by employers and employees
- used to help pay for state pensions and maternity leave
What’s is a progressive tax
The marginal rate of taxation rises as income rises
What is a proportional tax
Also known as a ‘flat’ tax
- the marginal rate of taxation is constant, as income rises, you will pay more tax however the % payed is the same across all people
What are some direct and indirect affects that taxation can have on AD
- income tax = disposable income
- corporation tax = business investment
- tax on imports = trade
- national insurance = labour demand
- tax on wealth/ assets = consumption
What are some indirect and direct affects that taxation can have on LRAS and SRAS
- work incentives/ more active labour supply
- inward migration of key workers
- capital investment
- enterprise/ rise in entrepreneurship
- incentives to study
- promote trade
What is current spending
Day yo day running of the government eg: wages, raw materials etc.
it is renewed each year
What is capital spending
Spending on physical assets and infrastructure
More long term spending
What are transfer payments
Bette it’s and pensions for example, payments that are made from the government to people
Why is government spending important for the economy
- used to manage the level of growth of AD to meet macro policy objectives
- promotes equity
- provides the necessary infrastructure for society
- provides a safety net system of welfare benefits
- provides a socially efficient level of public and merit goods and helps to overcome market failure
What are the benefits of gov spending changes on AS
- welfare benefits reforms to create incentives to work and increase the labour supply
- firms spending on capital projects can be encouraged
- entrepreneurship can be encouraged
- human capital can be improved if education and training is subsidised
Wha is the economic importance of education spending
- may increase the skills and productivity of workers, rising LRAS
- improvements in the human capital will lower structural unemployment
- more innovation and competitiveness
What is the economics importance of gov spending on health
- improved health outcomes will boost the labour supply so will potentially raise LRAS
- improvement in productivity which could also push LRAS out
- lessens the risk of relative poverty
What is universal credit
A benefit payment for people out of work, it includes:
- housing benefits
- child tax credit
- income support
- working tax credit
- income-based Jobseeker’s Allowance
