4.5 Role of the state in the macroeconomy Flashcards
What are the 3 categories of public expenditure?
Current expenditures
- spending by gov in short term on goods/ services
- all daily payments
- e.g wages to teachers etc, medicine to NHS
Capital expenditures
- investments on infrastructure and capital equipment
Transfer payments
- payments made from gov with no goods/ services exchanged
- e.g unemployment benefits, disability payments
What are the reasons for changing the size and composition of public expenditure?
Changing incomes
Demographic changes
Changing expectations
Global Financial Crisis 2008
What is crowding out?
Where extra gov spending leads to lower private sector spending
What is crowding in?
Where extra gov spending leads to more private sector spending
How do economists argue about the affect of public expenditure on productivity and growth?
Free market economists:
Wasteful and inefficient as they argue there is crowding out
Command economists:
Believe leads to vital growth
- e.g roads, education, NHS, benefit system, R&D
Also could lead to crowding in
What is the Laffer Curve?
As tax rates increase, work incentives decreases
Eventually, a higher tax rate actually decreases the total revenue of taxation
Creates a semi-circular curve
- y-axis = tax rev £
- x-axis = tax rate %
How do regressive tax rates effect income distribution?
Makes income less equally distributed
- as the higher income you get, the less tax rate they pay
How do progressive tax rates effect income distribution?
Makes income more equally distributed
- as the higher income you get, the higher tax rate they pay
How does level of tax rates effect real output and employment?
Higher taxes mean more money is withdrawn from circular flow of income (leakage)
Leads to AD decreasing, meaning less for workers to produce
Increasing unemployment and decreasing real output
Higher taxes means higher costs for firms, shifting SRAS upwards
Decreasing real output and increasing unemployment
How does level of tax rates effect the price level of the economy?
Increase in taxes may cause a wage-price spiral
- where employees ask for a pay rise as they are getting less income, leading to higher costs for firms, causing higher prices, causing inflation, causing even more protests for higher wages.
Indirect taxes can also lead to cost push inflation
How does level of tax rates effect FDI flows?
Higher corporation tax, less inward FDI, therefore possibly decreasing tax revenues if elastic
What are automatic/ built in stabilisers?
Automatic fiscal changes as the economy moves through stages of the trade-cycle
Usually expenditure automatically increasing in recession
Happen automatically in background
What is a discretionary/ active fiscal policy?
Demand-side policy that uses gov spending and taxation policy to influence AD
Deliberate manipulation of gov expenditure and taxes to manipulate economy
What is national debt?
The accumulation of all previous fiscal deficits
Deficits add to national debt
What are the 2 types of fiscal deficit?
Cyclical deficit
Structural deficit
What’s cyclical deficit?
Deficit that occurs during recession that is expected
When gov receives less tax revenue and gov spending may increase
Tends to self correct when economy grows again
What’s structural deficit?
Present even when economy is operating at full employment
A real deficit
Caused by tax avoidance culture or for governance
Uk struggle with this due to high public spending, slow growth, tax burden, 2008 overhang, interest etc
What’s primary deficit?
Deficit that doesn’t include interest
What factors influence the size of the fiscal deficit?
State of economy
Housing market
Debt interest
Political priorities
Unforeseen events
What factors influence the size of national debts?
Size of fiscal deficit
Gov policies
How can the size of deficit and national debt effect interest rates?
The bigger proportion of debt of GDP, Govs have to borrow more as they cant cover their expenses
Govs compete with firms and consumers for loans
Higher demand for loans mean investors demand higher interest rates (yields) on gov bonds
Therefore increasing interest rates of economy
However, may not raise interest rates as:
- Gov may borrow abroad
- In a recession, private sector borrowing will fall
- quantitive easing used to borrow more at virtually zero interest
What is inter-generational equity?
Fair distribution of resources across various generations
How does the size of national debt effect inter-generational equity?
The higher debt, the more needed to pay back due to interest in the future
Leads to less inter-generational equity
How do inflation rates effect size of deficit and national debt?
Higher inflation allow Govs to pay back got less as it reduces value of debt
However, reduces purchasing power, making it more expensive to borrow abroad if exchange rates change
