Fiscal Policy Flashcards
Fiscal policy
The taxation and spending decisions of a government
Expansionary fiscal policy
Designed to increase AD
Contractionary fiscal policy
Designed to reduce AD
3 main areas of Government expenditure
1) Capital expenditure - improving the capital stock of the country
2) Current expenditure - running public services day to day
3) Transfer payments - benefits
Progressive tax
A larger percentage of income from high-income
E.g. UK income tax
Proportional tax
Same percentage of income from all income groups
E.g. In Russia, there is a flat income tax rate of 13%
Regressive tax
A tax that takes a larger percentage of income from low-income groups
E.g.Poll tax
What are the 2 types of tax
Direct tax - on the income or profits of the person who pays it
Indirect tax - on the goods and services
Examples of Direct tax
Income tax
Corporation tax
Inheritance tax
Capital gains tax
Examples of indirect tax
VAT
Excise duties
TV licence
Car tax
What is a budget deficit?
Government spending more that they receive in taxes. Borrowing needed
What is a budget surplus?
Government spends less than they receive
What is a balanced budget?
Government spend the same as they receive in tax
Budget deficits expansionary…
…wants to increase AD, borrow to find this
Budget surplus contractionary…
…wants to reduce AD e.g.reduce spending
Balanced budget neutral fiscal…
…not trying to influence AD
Two reasons for why governments operate a budget deficit?
1) Cyclical
2) Structural
Cyclical
The government needs to respond to the economic cycle. Obliged to run a deficit
E.g. to help the economy cope with recessions
Structural
When the economy is at full employment
Choosing deliberately to run a deficit
A good tax must be?
Convenient
Must be certain, no surprises
Must be fair/equitable (based on the ability to pay)
Automatic fiscal stabilisers
In a recession, tax revenue is falling but increased government spending on benefits, will help stabilise the economy
Designed to damp down fluctuations
A deficit is…
…current, how much the government will borrow this year
Debt is…
…constant for example - 20 years continuous deficits
Austerity
Cutting back on public spending - may lead to a recession