8) Fiscal Policy 1: G&T - MMT

Question 1

What is Fiscal Policy?

Answer 1

It is one of the methods used by governments in order to achieve their macroeconomic objectives (eg Economic growth)

Question 2

When and where do governments announce their budget?

Answer 2

Every year, once a year, governments everywhere announce their budget

Question 3

What is a budget?

Answer 3

A budget is simply a financial plan, an outline of expected spending and expected revenue for the next financial period

Question 4

Why is ‘expected spending’ important?

Answer 4

Expected spending (known as G) is a key component of AD, one of the most important injections into the circular flow of income

Question 5

Is T an injection or leakage?

Answer 5

T (Taxation) is a leakage from the circular flow

Question 6

What is T in macroeconomics?

Answer 6

We usually mean the revenue raise by the government through its taxes

Question 7

What are 2 different types of taxes?

Answer 7

Direct tax and Indirect tax

Question 8

What are Direct taxes?

Answer 8

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)

Question 9

What are Indirect taxes?

Answer 9

Taxes on goods and services

Question 10

What is the best example of an indirect tax?

Answer 10

VAT

Question 11

Who do we pay VAT to?

Answer 11

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

Question 12

What are 3 broad approaches to taxation?

Answer 12

Progressive, proportional and regressive

Question 13

What is progressive taxation?

Answer 13

Progressive taxation ensures that higher earners pay a higher % of their income in tax

Question 14

What is proportional taxation?

Answer 14

Everybody pays the same % of their income in tax

Question 15

What is regressive taxation?

Answer 15

It allows higher income groups to pay a lower % of income in tax and hits poorer groups the hardest

Question 16

What is the marginal rate of tax?

Answer 16

The rate of taxation we pay on the last £ we earn

Question 17

With proportional taxation what is the marginal tax rate like?

Answer 17

All incomes have the same marginal tax rate (called a flat rate)

Question 18

What is a flat rate?

Answer 18

Where all incomes have the same marginal tax rate

Question 19

What is an example of where a flat rate exists?

Answer 19

In Russia where the Flat rate is 15%

Question 20

Do Western countries use a progressive or proportional tax rate?

Answer 20

A progressive system is used so the highest earners pay a much higher rate on the top part of their earnings

Question 21

What is an example of the progressive system in place?

Answer 21

In the UK, every £ earned by Premier League footballers above £150,000 a year is taxed at 45%

Question 22

What marginal rate do most workers pay?

Answer 22

20%

Question 23

Is a regressive tax usually direct or indirect?

Answer 23

Usually indirect, indirect taxes are often regressive

Question 24

What categories government expenditure divided into?

Answer 24

• Current
• Capital

Question 25

What is the current government expenditure used on?

Answer 25

Is on the expense of running a country from day to day

Question 26

What is the biggest single expense of current government expenditure?

Answer 26

Paying the wages and salaries of public sector workers, eg teachers, doctors , nurses, soldiers, police officers etc

Question 27

What is also a massive expense that takes up current government expenditure?

Answer 27

• schools need heating and lighting
• hospitals need medicines
• the army needs bullets and protective equipment
• police cars need fuel

Question 28

What is the majority of our taxes?

Answer 28

VAT

Question 29

What does the vast majority of government expenditure go towards?

Answer 29

Mundane but essential needs like this

Question 30

Why do governments have Capital expenditure?

Answer 30

Governments need to plan for the future

Question 31

What is Capital Expenditure for?

Answer 31

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

Question 32

Which one is more important, capital expenditure or current expenditure?

Answer 32

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

Question 33

What does every government in the world face a dilemma between?

Answer 33

Dilemma between taxes and expenditure.

Question 34

Judgements: Explain the dilemma every government faces between taxes and expenditure: Part 1

Answer 34

• 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

Question 35

Judgements: if politicians are more left-wing, what are their decisions for taxation and expenditure?

Answer 35

• higher direct taxation
• higher government expenditure

Question 36

Judgements: if politicians are more right-wing, what are their decisions for taxation and expenditure?

Answer 36

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