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Economics > 4.5 role of state in the macroeconomy > Flashcards

4.5 role of state in the macroeconomy Flashcards

1
Q

what are the types of government spending?

A

-capital expenditure
-current expenditure
-transfer payments

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2
Q

what is capital expenditure?

A

spending on investment goods, items that are consumer over a period longer than a year, e.g new motorways, schools, hospital, street lights

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3
Q

what is current expenditure?

A

spending on goods and services that are consumed in a short period of time, e.g wages, heating, road grit

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4
Q

what is transfer payments?

A

payments by government for which there is no corresponding output, e.g state pensions, child benefit

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5
Q

what are reasons for government spending?

A

-market failure
-microeconomic market failure
-macroeconomic market failure

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6
Q

why is market failure a reason for government spending?

A

form of government intervention, implies that the government is solving a problem that the market cannot fix on its own

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7
Q

why is microeconomic market failure a reason for government spending?

A

spending on public goods- some goods would not be provided without government spending
spending on goods with positive externalities- some goods would be under consumed e.g healthcare
spending on methods to reduce the impact of negative externalities- some goods would could excessive harm and be overproduced

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8
Q

why is macroeconomic market failure a reason for government spending?

A

economic cycle- without government spending the effect of a recession may be longer lasting
inequality- left to the market the level of inequality may be too high

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9
Q

what reasons are there for changing size of public expenditure?

A

-level of GDP
- LEDC vs MEDC
-demand for public services
-ageing population
-trade cycle
-cyclical reason
-interest on debt
-inflation
-political priorities
-free market vs interventionist governments

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10
Q

changing size of public expenditure- LEDC vs MEDC?

A

lower income countries lack the tax base to raise revenues to pay for government spending, collection of taxes requires sophisticated administration by government departments

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11
Q

changing size of public expenditure- demand for public services?

A

increases in demand for healthcare, education etc, will increase the need for the government to fund them, may have come from increasing population sizes and ageing populations

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12
Q

changing size of public expenditure- ageing populations?

A

greater number of dependant people puts greater strain on public finances, greater spending on state pensions, greater need for medical provision

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13
Q

changing size of public expenditure- cyclical reasons?

A

greater need to spend on unemployment benefit during a recession, discretionary fiscal stimulus might be used to get out of a recession

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14
Q

changing size of public expenditure- interest on debt?

A

historic budget deficit requires borrowing which creates debt, level of national debt rises- size of the interest payments will increase, larger debt also requires higher interest rates which compounds the higher interest rate payments

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15
Q

changing size of public expenditure- inflation?

A

high levels of inflation requires large increases in nominal spending to prevent spending from falling real terms, governments can cut spending in real terms by freezing spending or increasing it at a rate lower than inflation

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16
Q

changing size of public expenditure- free market vs interventionist governments?

A

countries that are more market oriented tend to have smaller levels of public spending, changing political parties after an election may cause a change within a country

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17
Q

significance of public expenditure on productivity and growth?

A

free market view: public spending is wasteful and inefficient compared to private sector spending, cutting public spending should increase productivity and growth if it encourages private sector spending.

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18
Q

significance of public expenditure on productivity and growth? however:

A

public spending provides infrastructure for trade, high quality education improves human capital, comprehensive healthcare reduces ill-health, regional spending in depressed areas can boost GDP, benefits can be used as a positive incentive to work

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19
Q

significance of public expenditure on living standards?

A

government spending can help avert absolute poverty, increasing living standards for the poorest in society, spending can help redistribute resources to make the quality of life across society more evenly balanced, provision of public sector services like refuse collection and policing may enhance living standards for all in society

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20
Q

significance of public expenditure on living standards? however:

A

government can be inefficient and wasteful due to the lack of profit incentive, disincentive effects of tax and benefits might outweigh their benefits, individuals are best placed to make decisions about how their money should be spent

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21
Q

significance of public expenditure on the level of taxation?

A

high levels of government spending require high levels of taxation, high tax levels can create a disincentive effect on individuals and firms

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22
Q

significance of public expenditure on the level of taxation? however:

A

scandinavian countries have relatively high spending and taxation without major disincentive effect, high levels of spending can be possible without high taxation

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23
Q

significance of public expenditure on crowding out?

A

at full employment, there is a trade off between public and private sector spending, greater borrowing by governments may lead to financial crowding out (higher interest rates discourage private sector consumption and investment)

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24
Q

significance of public expenditure on crowding out? however:

A

transfer payments, unemployment (spending to boost aggregate demand when there is spare capacity could lead to crowding in), capital spending (government spending which increases the productive capacity of an economy may increase both private and public sector spending)

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25
Q

significance of public expenditure on equality?

A

government spending can be used to help redistribute income and wealth in the economy, use spending to provide funds that reach poorer sections of society , then this can close the gap between rich and poor

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26
Q

what is a direct tax?

A

tax levied directly on individuals and companies e.g income tax

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27
Q

what is an indirect tax?

A

tax levied on goods and services e.g vat

28
Q

what is a progressive tax?

A

tax where the proportion of income paid in tax rises as income rises e.g income tax

29
Q

what is a regressive tax?

A

tax where the proportion of income paid in tax falls as income rises e.g VAT

30
Q

what is a proportional tax?

A

proportion of income paid in tax stays constant as income rises e.g flat rate taxes

31
Q

what reasons are there for taxation?

A
  • pay for government expenditure
  • correct market failure (increasing resource allocation e.g alcohol)
  • manage the economy
  • redistribute income (taxing people at different rates)
32
Q

what is the economic impact of greater taxation? increased income equality

A

increased income equality- greater redistribution effect e.v depends on how tax revenues are used and whether other fiscal changes offset the impact of the higher marginal tax rate

33
Q

what is the economic impact of greater taxation? impact on incentives to work?

A

impact on incentives to work- could act as a discinective to take higher paid jobs, negative impact on the supply side of the economy e.v workers might work harder to maintain standard of living, lower taxation on the poorest may increase the incentive to take paid work for the unemployed

34
Q

what is the economic impact of greater taxation? tax revenues/ public finances?

A

raising of tax levels should raise tax revenue, could be used as part of an objective of reducing budget deficit e.v depends at what rate of tax that tax revenues are maximised, also depends on overall impact on AD & economic growth

35
Q

what is the economic impact of greater taxation? laffer curve

A

explains why tax revenues may not rise when tax rates are increased, used as a justification for lowering the rate of tax

36
Q

what is the economic impact of greater taxation? tax evasion

A

could cause an increase in tax evasion and tax avoidance, greater incentives to avoid, e.v depends on tax structure- loopholes tax avoidance is easier, depends on powers of tax authorities to collect taxes and enforce payments

37
Q

what is the economic impact of greater taxation? tax exiles

A

increase in number of tax exiles, richer people have an incentive to move to countries with lower top rates of tax, e.v income tax is not the only factor which influences a person’s decision on where to live

38
Q

what is the economic impact of greater taxation? stimulus to aggregate demand

A

redistribution from rich to poor could lead to greater spending due to higher marginal propensity to consumer for poorer households e.v impact may be undermined by tax avoidance/ evasion, if greater progressive taxation is associated with greater tax levels generally then this creates a larger withdrawal from the circular flow

39
Q

what is the economic impact on aggregate demand? reduce disposable income

A

taxes like income tax and national insurance reduce disposable income- resulting in a fall in consumption and a fall in AD e.v revenue from taxes is spent by the government, the impact may be neutral, or even stimulative

40
Q

what is the impact of taxes on aggregate supply?

A

rise in taxes like VAT, excise duties and employers national insurance contributions raise costs to firms, fall in SRAS, fall in real output, employment and a rise in price level e.v economic impact may be offset by tax cuts elsewhere or spending by the government, impact on inflation rate will be temporary

41
Q

what is the impact of taxes on the trade balance?

A

rise in taxes on households will reduce disposable income and therefore levels of consumption, less spending on imports improving the balance of trade e.v if drop in aggregate demand leads to spare capacity there may be a fal in investment

42
Q

what us the impact of taxes on FDI?

A

FDI is investment by a foreign company where there acquire an interest in a domestic company- countries compete to attract FDI because of it positive impact on employment, e.v can lead to a race to the bottom- if all countries lower their corporation taxes then it leads to a lowering of tax revenues

43
Q

measuring fiscal deficits and surpluses and national debt?

A

amount measured in money terms may not be as useful as measuring as a percentage of GDP, total deficit and debt values don’t give a sense of significance, measuring it as a percentage of GDP enables a greater sense of how sustainable the debt and/ or deficit

44
Q

cyclical deficit?

A

occurs because government spending and revenues fluctuate through the economic cycle, in a boom a surplus should be seen, greater tax receipts and fewer benefits paid out as more are employed, reversed in a recession

45
Q

structural deficit?

A

occurs when the cyclical deficit is zero at the top of a boom, if an economy goes through a full economic cycle and stays in deficit throughout, then it has structural deficit, seen to be a problem, national debt is likely to grow overtime

46
Q

factors influencing size of fiscal deficits? cyclical reasons

A

as the economy moves into a recession tax receipts decline as the number of people employed falls and government spending rises to pay for their benefits

47
Q

factors influencing the size of fiscal deficits? structural reasons

A

-high levels of tax avoidance or tax evasion
- demographic pressures
-government inefficiency
- high levels of government subsidies/ financial support

48
Q

factors influencing size of fiscal deficits? keynesian fiscal deficits

A

government may choose to conduct expansionary fiscal policy in order to boost a struggling economy, discretionary spending, extra spending happens by choice

49
Q

factors influencing the size of fiscal deficits? exogenous shocks

A

unforeseen external shocks may cause a deficit, natural disasters create the need for emergency spending and may harm tax revenues at the same time

50
Q

factors influencing the size of fiscal deficits? debt interest

A

larger the debt interest the more that has to be paid each year, larger national debt or a higher interest rate will push up the level of debt interest, interest rates will be determined by a combination of market rates and the credit rating of the government

51
Q

measures to reduce the deficit?

A
  • running budget surpluses (reducing government spending/ increasing taxation)
    -policies to generate economic growth, leading to a reduction in government spending, increase in tax revenue
    -policies to cut down on tax avoidance/ evasion
    -privatisation/ outsourcing/ public-private partnerships to reduce government spending
52
Q

factors influencing the size of national debt? history

A

history of budget deficits and surpluses, national debt is a cumulative measure of all historical fiscal deficits and surpluses added together, longer the period of structural deficits , larger the level of national debt can be expected to be

53
Q

factors influencing the size of national debt? corruption

A

many developing countries have had hude loans from other countries, financial institutions or IMF

54
Q

significance of large fiscal deficits and national debt?

A

-nominal vs % of GDP, large nominal deficit or level of national debt may be very manageable if it is a low percentage of GDP
-rate of growth of GDP, fast growing GDP will reduce the level of deficits/ debt as a percentage of GDP, this would make it more manageable over time
-impact of cyclical deficits

55
Q

budget deficit reduction? reducing government spending

A

-reducing government spending
-increasing tax rates (if combined with lower interest rates then it doesn’t have to be deflationary)
e.v ceteris paribus this will cause a withdrawal, worsening budget balance, impact will depend on type of spending cuts or tax increases

56
Q

budget deficit reduction? economic growth

A

higher employment, incomes and spending should raise tax revenues and reduce spending on benefits, also reduces and deficit as a proportion of GDP e.v depends how its achieved, expansionary monetary policy will not increase a deficit whereas expansionary fiscal policy will

57
Q

debt reduction?

A

reducing a deficit/ targeting a surplus- debt will continue to grow while a country runs a budget deficit, budget surplus will reduce the total amount of debt in absolute terms, balanced budget will reduce the debt as a proportion of GDP if GDP is growing

58
Q

what a world demand shock?

A

associated with a rise or a decline in spending and confidence abroad (demand side policies could be used to boost AD)

59
Q

what is a world supply/ price shocks?

A

these affect the global supply and prices of goods and services (supply-side policies or deflationary demand-side policy could help control prices)

60
Q

what is a world financial shock?

A

occur in the global financial system, such as increased stress in the international banking system or financial market (financial bailout/ guarantees can restore confidence)

61
Q

measures to control global companies operations? regulation of transfer pricing

A

transactions between companies in the same multinational group form up a significant proportion of global trade, transfer prices can be set up to allocate more profits to countries with lower tax rates, countries try to apply rules to limit companies ability to exploit these tax loopholes

62
Q

measures to control global companies operations? limits to government ability to control global companies

A

tax rules are complex and pursuing tax claims against MNCs create additional costs to HMRC, lack of coordinated tax regimes result in a race to the bottom to attract foreign companies to set up by lowering corporation tax, political lobbying and/ or corruption by MNCs may lead to favourable treatment

63
Q

problems facing policymakers when applying policies? inaccurate information

A

imperfect information, requires a full cost benefits analysis impractical to gain full info, assumptions are made, inaccurate or out of date info could include on GDP, unemployment or the balance of payments on current account when setting interest rates

64
Q

problems facing policymakers when applying policies? risks and uncertainties

A

may be difficult for the government to predict the impact of: quantitative easing, impact of a country leaving the EU, consumers and firms can be unpredictable

65
Q

problems facing policymakers when applying policies? inability to control external shocks

A

in an increasingly globalised world in which countries are more closely integrated economically, it becomes more and more difficult for an individual country to isolate itself from external shocks. e.g financial crises, covid, policies employed have unintended effects

Economics (20 decks)

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