ECON4 Affect of government policy Flashcards
Git Gud
3 reasons for public expenditure
Efficiency, Equity, Macro management
What is capital expenditure
Spendign on investment goods (longer than a year) which can be used more than once
What is current expenditure
Reoccuring payments for goods and services (paying for drugs for NHS)
What are Transfer payments
One way payments where no goods or services are exchanged, usually benefits/aid
What is the purpose of transfer payments?
They redistribute income from rich to poor and provide a basic standard of living
What % of government spending is on health
15%
What is the largest proportion of government spending on?
Current expenditure on running costs
How is government expenditure measured in relation to the wider economy?
Gov’t spending as a % of GDP
What % of GDP will gov’t spend in 2022-23?
43.20%
How does level of government spending affect productivity and growth (2 big brief ideas)
Government can boost AS by spending on supply side policies, Fiscal policy can stabilise trade cycle and stimulate growth
How does government spending affect productivity and growth?
- Create infrastructure which can give businesses external economies of scale
- Education shifts LRAS to the right as it creates human capital
- Healthcare reduces the days lost to illness and allows workers to work longer
- Government spending can create a multiplier on growth
How do free market economists view government spending on productivity?
Free market economists argue that government spending is wasteful and causes inefficiency
How does Government spending increase living standards?
- Government corrects market failure and provides public goods which improves social welfare
- Reduce absolute poverty through welfare
How can it be argued government spending reduces living standards (2)?
- It can be argued that the government is inneficient so taxation is used ineffectively and with lower taxation the economy would be more efficient
- Principle agent problem applies as government spends money on behalf of the people and the agents in government may have different aims
What is resource crowding out
extra government spending leads to reduced private sector spending
How does government crowd out borrowing? (4 COR)
By increasing spending government may have to increase borrowing - which increases the interest rate - firms can’t access credit - firms don’t invest
What is crowding in
Increase in G leads to higher public sector spending
PPF and crowding in/out
in- shift out (new PPF or better use)out - shift along
How might high government borrowing increase taxation? (2)
Increasingly need to pay more interest, If confidence is lost in gov’ts ability to pay back debt they may have to raise interest to attract creditors
What is a direct tax
Tax levied on economic agents
What is an indirect tax
tax levied on a G/S
What are the three tax systems for income tax?
Progressive, Regressice and Proportional
What is progressive tax
Higher income = Hugher marginal rate of tax
What is regressive tax?
Higher income = lower marginal rate of tax
What is proportional tax?
When the same rate of tax is paid on income regardless of the size of income
Why tax (4)
Fund Government, Correct market failure, Manage the economy, Redistribute economy
What are the canons of taxation
Cost to collect is low % of yield, Timing and amount is clear, Payment/timing is conveniant, equitable
What is a hypothecated tax
tax linked to a specific area of G
What does the laffer curve show
Tax revenue and tax rate
What is tax competition
low corporation tax to attract investment
Name some main UK taxes
income, National insurance contributions, Inheritance, excise, VAT, Council, Business
How does higher marginal tax level affect Incentives to work
Higher marginal rates of tax can incentivise some people to work to less as the opporunity cost of leisure time becomes lower
What is the free market view on the affect of low taxation on productivity? What is the counterpoint to this?
That lower taxes incentivises:
- Longer Working hours
- Accepting promotions
- Joining the Workforce
There is no evidence to suggest this and it can be argued that higher taxation incentivises people to work longer to maintain their income
What concept does the Laffer curve demonstrate
That up until the peak government revenue increases as the increased taxation takes more from each economic agent, however beyond the peak economic agents start to work less as the high tax slowly removes the incentive to work
What is the impact of direct taxation on AD and what affect does this have on the wider economy? (Think Keynes graph)
Direct taxes affect AD (Wealth Affects, disposable income) so a change could lead to an increase and decrease in AD
What affect does increased indirect taxes have on AS? (Keynesian or Classical if you’re weird)
Indirect taxes are part of the business’s variable costs, therefore as indirect taxes increase unit costs increase which leads to an upwards (or leftwards in you’re classical) shift in AS
What impact can tax have on LRAS?
Can be argued taxes reduce incentive to work reducing size of labour force and reducing LRAS
2 types of G
Automatic stabilisers, discretionary fiscal policy
What is the structural deficit
A budget deficit that exists at all points of the business cycle
Link equation between deficit types
Structural deficit = actual deficit - cyclical deficit
How do taxes positively affect the trade balance? (and what’s a counterbalance)
Increase taxation = lower disposable income therefore lower spending therefore less spending on income.
