4.5 Role of the state in the macroeconomy

Question 1

current Expenditure

Answer 1

Public spending on the day-to-day running costs of the public services. E.g., the salaries of Doctors, Nurses and teachers.

Question 2

Capital Expenditure

Answer 2

Government spending on capital goods – public investment. E.g, building roads, rail, infrastructure.

Question 3

Transfer payments

Answer 3

Government spending which transfers income from one household to another – welfare benefits, pensions.

Question 4

Progressive tax

Answer 4

The % of income paid rises as your income rises (income tax).

Question 5

Regressive tax

Answer 5

The % of income paid falls as your income rises (VAT).

Question 6

Proportional tax

Answer 6

The % of income paid is constant no matter your income (rare – an example would be a ‘flat’ income tax with just one rate).

Question 7

The Laffer Curve

Answer 7

Relationship between the tax rate imposed and the revenue raised. Argues that very high marginal rates can reduce tax revenues through disincentive effects and tax avoidance.

Question 8

National Debt / Public Debt

Answer 8

Accumulated budget deficits over time. Money owed by the Government to those who hold Government bonds.

Question 9

Cyclical Budget deficit

Answer 9

Budget deficit caused by the economy’s position in the economic cycle (caused by the automatic stabilisers).

Question 10

Structural Budget deficit

Answer 10

The Budget deficit which remains after accounting for the cyclical budget deficit.

Question 11

Fiscal rules

Answer 11

Rules designed by Government to control fiscal policy and help control public spending.

Question 12

Debt sustainability

Answer 12

Whether the Government’s national debt is sustainable over the long-term. Depends on the size of the debt, whether the Government is adding to it (budget deficits) the interest rate the Government must pay on its debt and the overall rate of economic growth.

Question 13

Debt interest burden

Answer 13

The amount the Government must pay each year in debt interest payments.

Question 14

Discretionary fiscal policy

Answer 14

Fiscal policy consciously enacted by the Government to affect AD. Deliberate choice to raise/cut spending or tax rates to influence the economy.

Question 15

Automatic stabilisers

Answer 15

Automatic fiscal policy changes that are not caused by a Government cutting or raising taxes/spending. When Budget deficits rise in recessions (as unemployment rises and people claim JSA), the Government automatically moves into a Budget deficit. The deficit helps boost economic growth and stabilize the economy.

Question 16

Austerity policies

Answer 16

Large cuts to public spending and higher tax rates. Enacted since 2010. Controversial attempt to reduce the Budget deficit and control national debt.

Question 17

Office for Budget Responsibility OBR

Answer 17

UK Independent body which checks the economy’s macro data and advises on whether the Government has met its fiscal rules. Plus looks at the long-term sustainability of Government spending.