4.5 The state and the macroeconomy Flashcards
Define current expenditure
purchase of goods and services such as teachers salaries (day to day recurring expenditure)
Define capital expenditure
purchase/investment of goods used to make other goods or provide a service e.g. HS2
Define transfer payments
payments with no expectation of anything in return e.g. welfare and pensions
What type of expenditure can governments borrow to finance?
Capital
Name 4 purposes of public spending
Provide public and merit goods
Manage economic cycle (bust)
Reduce effect of market failure
Increase international competitiveness
Name 3 things the effectiveness of government spending can depend on
Opportunity cost
Multiplier effect
Effectiveness in reducing market failure
Name 5 things the amount of public spending depends on
Tax revenue
Demand for public services
Demographics
State of economy (recession/boom)
Fiscal policy (interventionist gov?)
Debt interest
Why is there a change in the components of public spending? (3)
Aging population
Increase in school age
External shock e.g COVID
Define resource crowding out
when government producing goods and services, crowds out private sector producing goods and services
Define financial crowding out
when government borrowing (bonds), crowds out the ability of private sector firms to sell bonds/raise finance
Name 3 reasons for tax
Pay for goods and services
Correct market failure
Redistribution
Define direct tax
Tax where the burden cannot be passed on
Define indirect tax
Burden can be passed on to another party
What does the laffer curve show
Relationship between tax and tax revenue - increases, then decreases as people move abroad/avoid paying if tax is too high
Define automatic stabiliser
Government spending items that bring economy back into equilibrium without extra action
Define discretionary fiscal policy
When the government intentionally makes changes to spending rather than it happening automatically
Define fiscal deficit
When a government spends more than it receives that year
Define national debt
Sum of all the government debts built up over many years
Define structural deficit
A deficit that persists even if the economy is at full employment
Define cyclical unemployment
The deficit that exists due to the stage in the economic cycle
Name 4 external shocks
Financial crisis
Coronavirus
War in Ukraine and sanctions
Rise in protectionism and deglobalisation
Name 3 macroeconomic policies used to respond to external shocks
Change in gov spending
Change in tax
Monetary policy e.g QE
Name 3 measures used to control global companies
Close tax loopholes
Fines
Control over profit (so less can be repatriated)
Name 3 problems for policymakers when creating policy
Inaccurate information
Risk and uncertainty
Inability to control external shocks
Define transfer pricing and why it is bad
pricing transactions between companies in the same groups - allocate profit to countries with lower tax rates
Used as a way to avoid paying tax
Define the crowding out effect
increased government spending ultimately decreases private sector spending. This is due to the higher cost of loans and reduced income that can result when the government increases taxes
