Fiscal and Supply Side Policies Flashcards
Fiscal Policy
Management of the economy by using government spending and tax
Managing the Economy Using FP
Growing the economy:
Increase gov spending, reduce tax
Slow growth:
Reduce spending, increase tax
Purpose of Taxation
Allocate resources efficiently
Distribute income more evenly
To meet certain needs
To manage the economy
Direct vs. Indirect Tax
Direct: taxes on people or companies earnings or increases in wealth
Indirect: imposed on one section of the economy, but burden of paying the tax will be borne by another section
Indirect Taxes
Ad valorem - VAT/taxes on transaction value
Unit - levied on specified number or weight
Excise duty - levied on sale/use of certain products
Property - levied on sale or rent, or transactions linked to sale
Wealth - annual charge as % of your wealth
Consumption - on purchase value of goods/services/ Can be single or multi stage
Progressive Tax
High earners pay more as a % of their earnings than lower earners, e.g income tax.
As income rises, % paid in tax rises
Regressive Tax
Low earners pay more as a % of their earnings than higher earners, e.g sales tax.
As income rises, % paid in tax falls
Proportional Tax
High and low earners pay the same % of their income in tax
As income rises, % paid stays the same
Public Sector Net Borrowing
Amount governments borrow to cover the shortfall between taxation revenue and gov spending
Fiscal Deficit
Gov spending is higher than tax revenue.
Advantage: higher growth as injections are above withdrawals
Disadvantages: higher interest rates and payments
Cyclical Deficit
Deficit arises where an economy is on a downward trend as gov spends more and tax levels drop. It will be offset by a surplus during an uplift in the economy
Structural Deficit
Arises from a more permanent imbalance which can arise from: An ageing population Resistance to tax rises Resistance to reduced public spending Development of the economy Wage inflation
Fiscal Surplus
Where taxation revenue is higher than gov spending. A policy of surplus may result in:
Slowed growth
Unemployment
Less investment
Balanced Budget
When tax rev and gov spending are equal. Occurs when the gov doesn’t want to grow or slow the economy, or where the gov is using monetary policy to manage the economy,
Supply Side Policy
Gov spending designed to make the economy more efficient or productive. Includes spending on education, healthcare, infrastructure among others.
Supply Side: Encouraging Competition
Privatisation: transferring state owned activities to the private sector
Deregulation: allowing private sector companies to compete with state-owned businesses
Supply Side: Encouraging Investment
Decreasing business taxes
Providing tax relief and allowances
Deregulating financial markets
Supply Side: Improving Labour Effectiveness
Provision of training Reduce power of trade unions Reducing min wage and protections Reducing income tax Reducing benefits Providing childcare vouchers
Other Supply Side Policy
Improve transport and communications infrastructure
Encouraging R&D
Reducing bureaucracy
Regional policies
Supply Side Advantages and Disadvantages
Advantages:
Competitiveness increases leading to improved overseas trade
Less gov influence leads to greater choice
Less likely to cause inflation than monetary or fiscal policy
Less likely to impact national debt
Disadvantages:
Long term, not short term
Some policies will be unpopular
Restriction of unions may exploit workers
Removal of min wage, protections and benefits creates uncertainty
Success of Gov Policy
Dictated by: Quality & availability of information Membership of external organisations Time to take affect External events Political outcome
