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Macro Year 13 > Chapter 5 - Public expenditure > Flashcards

Chapter 5 - Public expenditure Flashcards

1
Q

Definition of Public expenditure

A

Funds and rescources allocated by the government to social goods and services

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2
Q

Role of public expenditure

A

Stimulate economic growth
Satisfy needs

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3
Q

Capital expenditure

A

Investment in goods and assets
- Infrastructure
- Equipment
- Streetlight

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4
Q

Current expenditure

A

Final consumption in spending on goods and services consumed in a short period of time and transfer payments and debt interests
- Wages
- Heating
- Lighting

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5
Q

Transfer payments

A

Payments made to individuals by the government that doesn’t give output
- Unemployment
- State pensions

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6
Q

How is government spending measured

A

As a percentage of GDP

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7
Q

Debt interest

A

The interest that needs to be paid for previous borrowing accumulated in the past

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8
Q

Reasons for changing size and pattern of public expenditure

A

Changing incomes - VAT is regressive and promotes inequality
Changing GDP - recession leads to an increase in public expenditure
- Expansionary fiscal policy
- Increase welfare benefits
Changing age
Changing expectations - increase the income of a country leads to increase in demand of better quality products

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9
Q

Significance of changing public expenditure as a proportion of GDP

A

Tax - if government expenditure is a high proportion of GDP, it is only sustainable if tax revenues are also a high proportion of GDP
Productivity and growth
- Free market: private is better than public - cutting government expenditure can lead to a rise in productivity + growth
- Planned: government can be efficient

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10
Q

Crowding out

A

As government spending rises, private spending falls, so IR rise and borrowing decreases.

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11
Q

Why do we tax?

A

Government revenue for expenditure
Correct market failure
Manage the economy
Redistribute income

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12
Q

Direct taxes

A

Taken from the income of individuals
- Income: on earnings (usually progressive)
- Corporation: on business profits
- Wealth: on value of properties
- Capital gains: on profits from sales

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13
Q

Indirect taxes

A

Taken from goods and services spent
- VAT: on business (usually passed on to consumers)
- Tariffs: on imports
. Excise duty: on quantity buyed

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14
Q

Proportional

A

Same tax for all
Encourages people to earn more as tax doesn’t change
- Also known as flat tax

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15
Q

Progressive

A

As income increases, tax rises - direct taxes usually
- Should help reduce inequality

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16
Q

Regressive

A

As income rises, tax falls - indirect taxes usually
- Less equitable distribution of income

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17
Q

Tax avoidance

A

Reporting deductions in income, to pay less/no tax

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18
Q

Tax evasion

A

Breaking the law to avoid paying tax - hiding money

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19
Q

Increase tax (as an economic effect)

A

Less employed
Tax avoidance/evasion
- EVAL: depends on magnitude of increase - Laffer Curve

20
Q

Income distribution (as an economic effect)

A

Improves with tax
- EVAL: depends on
1. VAT increases, so inequality increases
2. Income tax increases, so inequality falls
EVAL: tax avoidance
3. Corporation tax increases, so equality rises
EVAL: unemployment may rise

21
Q

Prices (as an economic effect)

A

Indirect taxes - cost push inflation
Expansionary fiscal policy - demand pull inflation

22
Q

BOP (as an economic effect)

A

Tariffs imposed = improvement
- EVAL: retaliation

23
Q

Stables taxes (as an economic effect)

A

Encourage FDI

24
Q

Employment (as an economic effect)

A

Incentive to work up until a point when tax is too high

Expansionary fiscal policy:
- RNO: increases
- Economic growth: increases
- Employment: increases

Contractionary fiscal policy:
- RNO: decreases
- Economic growth: decreases
- Employment: decreases

25
Q

Fiscal deficit

A

Government expenditure > Tax revenue
- Borrow money to cover costs

26
Q

Fiscal surplus

A

Government expenditue < Tax revenue

27
Q

National debt

A

Fiscal deficits accumulated over years
- EVAL: The size of the deficit/debt as a proportion of GDP is important to see if the country can cover it

28
Q

Automatic stabilisers

A

Mechanisms that increase spending or decrease taxes
- Recession: decrease tax

29
Q

Discretionary fiscal policy

A

Deliberate changes in government expenditure + taxes to influence AD
- Keynes: recession: increase spending

30
Q

Structural deficit

A

Deficit due to an imbalance in the revenue and expenditure of the government
- Boom and recession

31
Q

Cyclical deficit

A

Deficit during a recession when governments increase spending to stimulate the economy

32
Q

Factors influencing the size of deficits

A

Business cycle: increase spending during recessions
- Tax falls
- Employment falls
Interest payments: IR rise - deficit increases
Privatisation: improve budget deficit
Government policy: expansionary fiscal policy - bigger deficit
Demographic change: ageing population - bigger deficit
- Less tax, less employed
- EVAL: migration of economically active

33
Q

The factors influencing the size of deficits will also affect

A

The size of debt

34
Q

When does debt fall

A

When there is a surplus

35
Q

Significance of the size of deficits and debts

A

Cost of borrowing increases
Higher taxes
Higher IR - crowding out
Demand pull inflation
Intergenerational equity - increasing debt benefit current citizens, but will be payed by future taxpayers
- EVAL: debt value falls over time due to inflation

36
Q

Macroeconomic policies

A

Fiscal: use of tax and government expenditure by the government to achieve its policy objectives
Monetary: changes to interest rates and the monetary supply to achieve the government’s objectives
Exchange rate
Direct controls: measures imposed on the price/quantity of goods
- Min and max price
- Quota and tariff
Supply side policies: government policies to increase productive potentials

37
Q

Reduce fiscal deficits and national debts

A

Less government spending + high taxes - fiscal austerity
- EVAL: leads to lower economic growth and unemployment may rise if tax is too high
Economic growth: increase revenue from taxes
Governments can issue bonds to raise finance or can default on debts - this makes it difficult to access credit in the future

38
Q

Monetary policy

A

Includes interest rates, quantitative easing and exchange rates
Deflationary: reduce inflation
Inflationary: create inflation

39
Q

Interest rates (monetary policy)

A

Fall in base rate will lead to a rise in AD

40
Q

Quantitative easing (monetary policy)

A

Pump money into the economy
Used when inflation is low, and it isn’t possible to lower interest rates further

41
Q

Policies to respond to external shocks in the global economy

A

Commodity prices: a raw material used in the production process/consumed on its own
- Supply is inelastic in the short run
- Demand is inelastic
- Supply can vary due to the weather
Accomodating prices: raise to full employment and protect household incomes
Deflationary fiscal and monetary policy: remove inflation
- AD falls = fall in demand pull inflation

42
Q

Policies to reduce poverty and inequality

A

Expansionary fiscal and monetary policy
- Government expenditure rises
- Tax cuts
- Direct controls

43
Q

Measures to control TNCs

A

Reducing tax avoidance - move revenues and profits into low tax countries
Regulation of transfer payments
Limit to government’s ability to control TNCs

44
Q

Impact of policy changes on different economies

A

Local economic: important to implement policies in rural areas
National economies: most policies aim to change the whole economy
Global economies: changes nationally affect globally

45
Q

Problems facing policy matters

A

Inaccurate information
- EVAL: impractical to gain every bit of information
Risks and uncertainties
Inability to control shocks

Macro Year 13 (6 decks)

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