Fiscal Flashcards
Direct and indirect taxation
Direct- one that cannot be passed onto another person e.g. On incomes
Indirect- a tax on spending, termed indirect as a producer can shift it on to the consumer by charging for a higher price,though the tax cannot be passed on in full
Why governments levy taxes
To raise revenue to finance public expenditure
To change patterns of economic activity
To discourage production and consumption of certain products
To redistribute income
Hypothecated tax
A tax levied to raise money for a specific purpose
Principles of taxation
Should be economical - inexpensive to collect relative to the amount raised
Equitable
Efficient- few side effects/ unexpected consequences
Flexible - easy to change
Convenient- easy and convenient to pay
Certain- tax payer should be able to figure out how much they will pay
Public expenditure
Current expenditure-the government spending on the day to day running of its services
Capital expenditure- government spending on investment projects, such as new infrastructure
Public food provision
Merit good provision
Welfare expenditure
Debt interest
Cyclical and budget deficit
Structural -Where the government finances remain in deficit/surplus after the effects of economic growth are taken out (therefore a prolonged period of economic Growth will not eliminate a structural deficit)
Cyclical-portion of a budget deficit that changes when the rate of economic growth changes
Consequences of budget deficit and surplus
Economic growth- a deficit implies that the fiscal policy is adding to aggregate demand and a surplus would suggest that fiscal policy is subtracting from AD
Unemployment- a gov can reduce unemployment levels through expansionary fiscal policy. Higher government spending and a larger budget deficit may create more demand for labour however some economists argue that in the LR unemployment will return to its natural rate and will be independent of the budgetary policy
Inflation-demand pull inflation through excessive AD
National debt
The stock of all outstanding government debt that has yet to be repaid
The budget deficit will add to the national debt
Where as a surplus will reduce it
The significance of the national debt
Budget positions adds or reduces the national debt
Those who buy government bonds will demand higher interest on the bond if they believe there is a chance that the national debt will get out of control (depends on credit ratings )
The national debt (as a percentage of GDP) will fall if the rate it grows is lower than the rate at which GDP grows
Deficit may seem large, but Uks is not large when compared to trading partners and is lower than certain points in our history
Office for budget responsibility (OBR)
Functions
Economic forecasting
Evaluating fiscal policy
Analysis of the sustainability of public finances
Evaluation of fiscal risks
Analysis of tax and welfare costing
