4.5 Role of the State in the Econonomy Flashcards
What are the 3 types of Public Expenditure?
- Capital Government Expenditure (Roads, schools)
- Transfer payments (e.g., benefits)
- Current Government Expenditure
What are the 5 impacts of Government Public expenditure?
- Productivity and growth
- Living Standards
- Crowding out
- Level of Taxation
- Equality
What is crowding out?
- When Government spending fails to increase AD because it causes equivalent fall in private sector spending and investment
(the government has to compete against the private sector for resources, causing higher interest rates)
What are the 3 affects of taxation?
- Progressive: Tax that takes a higher percentage from people on higher incomes (income tax)
- Regressive: Tax that taxes a higher percentage of tax on lower incomes (VAT)
- Proportional: Tax that affects everyone equally
What are the 7 Impacts of Tax changes?
- Incentives to Work (higher tax = less incentives to work)
- Tax Revenues (laffer Curve)
- Income distribution (can lead to equality if progressive)
- Real Output and Unemployment (can reduce AD = less disposable income, can reduce AS = higher cost for firms)
- Price Level (can cause cost-push inflation)
- Trade Balance (increase tax means less imports0
- FDI flows (low tax attracts FDI)
What are Automatic Stabilisers?
- Mechanism to reduce the impact of changes in the economy on national income (e.g., government spending and taxation)
(e.g., during a recession, benefits increase as more people are unemployed, therefore benefits are automatic stabilisers)
What is Discretionary Fiscal policy?
- Deliberate manipulation of Government expenditure and taxation to influence the economy (deflationary and expansionary policies)
What is the difference between automatic stabilisers and discretionary fiscal policy?
- Automatic Stabilisers happen on their own, Discretionary fiscal policy is direct intervention
(e.g., during a boom, taxation automatically rises and benefit automatically fall)
What is fiscal deficit?
- Government spends more than it receives
What is national debt?
- Sum of built up Government debts over years
What is cyclical deficit?
- Deficit that occurs due to government spending and taxation around the trade cycle (e.g., during a recession, tax revenue is low, spending is high)
What is structural Deficit?
- Fiscal deficit that occurs when cyclical deficit is 0 (e.g., at the peak of a boom)
What happens if the government had structural deficit?
- National Debt will grow (as the government has to constantly borrow for spending)
What are 5 factors affecting the size of Fiscal Deficits?
- Trade Cycle (Key factor)
- Unforeseen events (natural disasters)
- Interest Rates
- Privatisation
- Oil Revenues
What factor affects size of national debt?
- Ageing Population (pensions and care)