Fiscal and Supply Side Policy Flashcards
Define Fiscal Policy
The use of government spending, taxation and the government’s budgetary position to achieve the government’s policy objectives
Why did the 2008 crash cause a record budget deficit
- Immense need for governement aid
- Many unemployed workers had to rely on benefits
- Less people in work to pay tax
- Many firms shut
What caused the £17bn budget surplus in 1987
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
Explain the 6 canons of taxation
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
What is a progressive tax
When the proportion of income paid in tax rises with income
Regressive Tax
When the proportion of income paid in tax falls as income rises
Proportional Tax
When the proportion of income paid in tax stays the same as income rises
Explain the 2 categories of Government Spending
Revenue Spending - Day to Day
Capital Spending - Long term, Infrastructure…, what the UK doesn’t do enough of
Why do governments spend
- Control economic activity and meet objectives
- Provision of public/merit goods
- Redistribution
What is Keynesian/Demand-side fiscal policy
Using overall levels of spending/taxation to manage AD and achieve full employment and stabilize the economic cycle
How is Keynsian Fiscal Policy used in the UK economy
- Discretionary spending Gx>T causing AD to increase
- Deficit Financing
- Allowing large spending multipliers due to Gx Overall short-term manipulation of AD
What is a Cyclical Budget Deficit
Deficit that follows the economic cycle
Usually goes from big deficits to small deficits
i.e Changes in tax revenues and welfare benefit spending
What is a Structural Budget Deficit
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
What are automatic stabilisers
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
What is discretionary Spending
Deliberate policy making
What is the Office for Budget Responsibilty
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
What is the Deficit Rule
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.
What is the Debt Rule
Fiscal Rule to ensure that debt is falling as a share of GDP by 2015/16
Though this never happened
What is Crowding Out
When the government borrows a lot of money, interest rates might increase.
This discourages spending and investment among the private sector.
Name 4 ways the national debt is significant
- 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
Explain 4 costs of a budget deficit
- 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
Explain 4 benefits of a budget deficit
- 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
Diagram showing the affect of supply side fiscal policy
Explain 4 benefits of supply side policies
- 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
