Fiscal and Supply Side Policy

Question 1

Define Fiscal Policy

Answer 1

The use of government spending, taxation and the government’s budgetary position to achieve the government’s policy objectives

Question 2

Why did the 2008 crash cause a record budget deficit

Answer 2

• Immense need for governement aid
• Many unemployed workers had to rely on benefits
• Less people in work to pay tax
• Many firms shut

Question 3

What caused the £17bn budget surplus in 1987

Answer 3

Back before the Monetary policy commitee 18 months before, the chancellor cut interest rates to a record low of 7.5%

Financial institutions were deregulated

Taxes were cut

The end of a period of privatisation that brought in extra revenue as government assets were sold

Question 4

Explain the 6 canons of taxation

Answer 4

Economy - Cheap to collect in relation to its revenue

Equity - Should be seen as fair, based on ability to pay

Efficiency - Should achieve objective with minimum undesired side-effects

Flexibility - Easy to change to meet new circumstances

Convenience - Convenient to pay

Certainty - Certain on the amount of tax one must pay

Question 5

What is a progressive tax

Answer 5

When the proportion of income paid in tax rises with income

Question 6

Regressive Tax

Answer 6

When the proportion of income paid in tax falls as income rises

Question 7

Proportional Tax

Answer 7

When the proportion of income paid in tax stays the same as income rises

Question 8

Explain the 2 categories of Government Spending

Answer 8

Revenue Spending - Day to Day

Capital Spending - Long term, Infrastructure…, what the UK doesn’t do enough of

Question 9

Why do governments spend

Answer 9

• Control economic activity and meet objectives
• Provision of public/merit goods
• Redistribution

Question 10

What is Keynesian/Demand-side fiscal policy

Answer 10

Using overall levels of spending/taxation to manage AD and achieve full employment and stabilize the economic cycle

Question 11

How is Keynsian Fiscal Policy used in the UK economy

Answer 11

• Discretionary spending Gx>T causing AD to increase
• Deficit Financing
• Allowing large spending multipliers due to Gx Overall short-term manipulation of AD

Question 12

What is a Cyclical Budget Deficit

Answer 12

Deficit that follows the economic cycle

Usually goes from big deficits to small deficits

i.e Changes in tax revenues and welfare benefit spending

Question 13

What is a Structural Budget Deficit

Answer 13

The part of the budget deficit that is not affected by the economic cycle but results from structural changes in the economy i.e The aging population, long-term unemployment Estimated to be 50% of UK deficit

Question 14

What are automatic stabilisers

Answer 14

Dampen or reduce the multiplier effects resulting from any change in aggregate demand, reducing the volatility of the ups and downs of the economic cycle i.e progressive tax - dampens rise in GDP Benefits - Dampens fall in GDP

Question 15

What is discretionary Spending

Answer 15

Deliberate policy making

Question 16

What is the Office for Budget Responsibilty

Answer 16

Created in 2010 An advisory public body that provides independent analysis of the UK’s public sectors finances as background to the preparation of the UK budget

Question 17

What is the Deficit Rule

Answer 17

Fiscal rule to balance the cyclically-adjusted current budget by the end of a rolling 5 year period.

To get rid of the structural deficit within 5 years, but it was never specified when the five years started.

Question 18

What is the Debt Rule

Answer 18

Fiscal Rule to ensure that debt is falling as a share of GDP by 2015/16

Though this never happened

Question 19

What is Crowding Out

Answer 19

When the government borrows a lot of money, interest rates might increase.

This discourages spending and investment among the private sector.

Question 20

Name 4 ways the national debt is significant

Answer 20

• Slowly dampens growth in the long-term
  
  • Larger interest payments and Crowding out
• Possible Sovereign Debt Crisis
  
  • When a country cannot pay back its ‘bills’, cannot get low-interest rates as banks are scared the country may go into ‘debt default’
• Debt - to - GDP Ratio
  
  • If this gets to 77%+ for an extended period, growth slows down
• Currency Value
  
  • Value is tied to the value of the country’s bonds

Question 21

Explain 4 costs of a budget deficit

Answer 21

• Crowding out
  
  • Less resources and finances left for private sector
• Hurts confidence
  
  • Foreign investors scared of taxes going up
• Oppurtunity cost of interest payments
• Often unproductive, wasteful
  
  • Government spending instead of you
  • More money not going through the price mechanism, more likely not to be efficiently allocated

Question 22

Explain 4 benefits of a budget deficit

Answer 22

• Net Injection
• Can shift LRAS
  
  • Depends what investments are
• Currently, due to very low interest
  
  • Financing a budget deficit is cheap
• Can increase revenue in the long run
  
  • Depends on what it is invested in

Question 23

Diagram showing the affect of supply side fiscal policy

Answer 23

Question 24

Explain 4 benefits of supply side policies

Answer 24

• Promotes a low inflation economy
• Lowers the NAIRU
  
  • Possible for higher level of unemployment
• Economic Utopia
  
  • Low inflation, long term growth and employment, more competitiveness
• Healthier Balance of Payments

Question 25

Name 4 Fiscal Supply side Policies

Answer 25

• Low Int. rates
• Public Sector Investment
• Subsidies
• Tax Breaks

Question 26

Name 4 Product Market Supply Side Policies

Answer 26

• Privatisation
• More open trade agreements
• Encouraging small business start ups
• Deregulation

Question 27

Name 4 Factor Supply side policies

Answer 27

• Flexible Labour markets
• Weakening Trade Unions
• Reducing Raw Material Tarriffs
• Improving incentives

Question 28

Name 4 free market supply side policies

Answer 28

• Privatisation
• De regulation
• Tax Cuts
• Reducing Welfare Benefits

Question 29

Name 4 Interventionist supply side policies

Answer 29

• Vocational Training
• Education Spending
• Increasing housing supply
• Health Spending