chapter 8 Flashcards
what occurs if a government expenditure exceeds a government revenues
a budget deficit
If government expenditure is less than government revenues then what will occur
then there will be a budget surplus.
why does the uk have a budget deficit
Most years, the government of the UK has had to borrow money to pay for the services that it provides as
the taxation revenue received that year in insufficient to pay for all of them. This means that the government
has a budget deficit
contractionary policies
hope to decrease general levels of demand.
expansionary policies
are aimed and increasing general
levels of demand,
How does fiscal policy help maintain full employment
Government spending on services such as education, health care, defence and law and order, as well as
other payments to the private sector are likely to contribute to ensuring higher levels of employment.
how does fiscal policy ensure price stability
The government can use fiscal policy to support price stability. Greater direct and indirect taxes can be used
to reduce demand and consumption. if prices are rising too quickly due to demand pull inflation. A reduction
in indirect taxes and Corporation Tax can be used to incentivise businesses to reduce costs. Government
subsidies and spending on projects can also enable businesses to produce a lower cost and therefore help
with preventing prices from rising too quickly.
how does fiscal policy help achieve economic growth
By using taxation and expenditure to promote demand the economy is likely to grow. For example, if the
number of people who are employed increases due to government spending then, on average, households
will have higher incomes – this will probably lead to an increase in consumption. If businesses are confident
that spending by consumers is increasing they are more likely to invest and increase output.
how does fiscal policy help us have a balanced, balance of payments
If the government attempts to keep prices stable by reducing demand (through higher taxation) then UK
products should remain competitive when being sold abroad. In this case, UK households are less likely to
purchase imports and the UK is likely to sell more exports.
how does fiscal policy help us achieve greater equality
Use of progressive taxation policies will enable the government to tax high income and wealthier people
and use these revenues to support low income and less wealthy households (through tax breaks or other
benefits).
how does fiscal policy help us get a sustainable environment
The use of indirect taxation (such as VAT) aimed at products that have a more harmful impact on the
environment could decrease their demand and help reduce the negative impact on the environment.
deficit disadvantages Debt interest payments
During a period of budget deficit, the government is forced to borrow money. When repaying this money, it must
also pay ‘interest’ on this debt. These interest payments are ‘lost’ – i.e. they consume government funds which
could have been used for public services.
why is government spending can be seen as a necessity during difficult economic crisises
Government spending can be seen as a necessity to keep an economy from shrinking. During difficult economic
periods, the government may need to spend to help support key industries and to pump money into an
economy to avoid unemployment and deflation.
advantage of gov deficit to Public Sector Investment
The Government’s budget deficit has also allowed some public-sector investments to continue, such as the
HS2 railway project. This investment may also support future growth of the economy, which leads to greater
employment and possible tax revenues, which in turn could be used to pay off the debt and the interest. In
addition, growing the economy will increase its GDP. Thus the amount of outstanding debt as a percentage
of GDP will shrink, giving the illusion that the debt has been paid off
disadvantage of deficit for gov taxation
A deficit cannot continue indefinitely – the government will eventually have to balance their books. In the future,
if this balance is not achieved through economic growth (which will bring in greater tax revenues) the government
will have to either increase taxation or continue to reduce its expenditure.
