8) Fiscal Policy 1: G&T - MMT Flashcards
What is Fiscal Policy?
It is one of the methods used by governments in order to achieve their macroeconomic objectives (eg Economic growth)
When and where do governments announce their budget?
Every year, once a year, governments everywhere announce their budget
What is a budget?
A budget is simply a financial plan, an outline of expected spending and expected revenue for the next financial period
Why is ‘expected spending’ important?
Expected spending (known as G) is a key component of AD, one of the most important injections into the circular flow of income
Is T an injection or leakage?
T (Taxation) is a leakage from the circular flow
What is T in macroeconomics?
We usually mean the revenue raise by the government through its taxes
What are 2 different types of taxes?
Direct tax and Indirect tax
What are Direct taxes?
Direct taxes are charged specifically to the individual or business paying it, mainly taxes on income or capital gained by the individual eg through working (income tax) or making a profit (corporation tax)
What are Indirect taxes?
Taxes on goods and services
What is the best example of an indirect tax?
VAT
Who do we pay VAT to?
We pay VAT on most things but we don’t pay it directly to the government; normally we pay it to the business seeking the goods or providing the service
What are 3 broad approaches to taxation?
Progressive, proportional and regressive
What is progressive taxation?
Progressive taxation ensures that higher earners pay a higher % of their income in tax
What is proportional taxation?
Everybody pays the same % of their income in tax
What is regressive taxation?
It allows higher income groups to pay a lower % of income in tax and hits poorer groups the hardest
What is the marginal rate of tax?
The rate of taxation we pay on the last £ we earn
With proportional taxation what is the marginal tax rate like?
All incomes have the same marginal tax rate (called a flat rate)
What is a flat rate?
Where all incomes have the same marginal tax rate
What is an example of where a flat rate exists?
In Russia where the Flat rate is 15%
Do Western countries use a progressive or proportional tax rate?
A progressive system is used so the highest earners pay a much higher rate on the top part of their earnings
What is an example of the progressive system in place?
In the UK, every £ earned by Premier League footballers above £150,000 a year is taxed at 45%
What marginal rate do most workers pay?
20%
Is a regressive tax usually direct or indirect?
Usually indirect, indirect taxes are often regressive
What categories government expenditure divided into?
- Current
- Capital
What is the current government expenditure used on?
Is on the expense of running a country from day to day
What is the biggest single expense of current government expenditure?
Paying the wages and salaries of public sector workers, eg teachers, doctors , nurses, soldiers, police officers etc
What is also a massive expense that takes up current government expenditure?
- schools need heating and lighting
- hospitals need medicines
- the army needs bullets and protective equipment
- police cars need fuel
What is the majority of our taxes?
VAT
What does the vast majority of government expenditure go towards?
Mundane but essential needs like this
Why do governments have Capital expenditure?
Governments need to plan for the future
What is Capital Expenditure for?
Plans for the future by improving the facilities available to the public; building better schools, bigger more modern hospitals, providing the armed forces with the latest ships, jets and tanks etc
Which one is more important, capital expenditure or current expenditure?
Capital expenditure is just as important as current expenditure, although it is easier to delay, meaning that in hard economic times it is often cut before current expenditure
What does every government in the world face a dilemma between?
Dilemma between taxes and expenditure.
Judgements: Explain the dilemma every government faces between taxes and expenditure: Part 1
- How they choose to prioritise, whether to forego some current expenditure in favour of more capital expenditure (or vice-versa) is almost always decided on political rather than economic grounds
- Similarly, the types and level of taxation chosen will vary depending on political judgements
Judgements: if politicians are more left-wing, what are their decisions for taxation and expenditure?
- higher direct taxation
- higher government expenditure
Judgements: if politicians are more right-wing, what are their decisions for taxation and expenditure?
eg US Republican Party, prefer minimal direct and indirect taxation, proportional rather than progressive taxes and far lower levels of government expenditure, particularly current expenditure
