Fiscal Policy Flashcards
What is government spending?
The total amount of money spent by the government in a given period of time
Direct tax
A tax on income or wealth paid directly by the bearer
Government
revenue
The source of finance for government spending
Indirect tax
A tax on spending, often defined as a tax on goods and services
Balanced
government
budget
When tax revenue is equal to government spending
Budget deficit
When government spending is greater than tax revenue
Budget Surplus
When government spending is less than tax revenue
Fiscal policy
A policy that uses government spending and taxation to affect
the economy as a whole
What is the purpose of government spending?
Social protection (the system of social security benefits)—–
• aims to provide everyone with a basic minimum standard of living and aims to
reduce inequality through redistribution of incomes
Health———————————
• to increase the welfare of the population through ensuring that everyone has
access to health services (NHS) regardless of income
Education—————————–
• to increase the welfare of the population through ensuring that everyone has
access to education regardless of income which helps reduce inequality of
opportunity
What are the sources of government revenue? From : -direct taxes -indirect taxes -local taxes
Direct tax——————————
Income tax (paid on wages, salaries, pensions, interest, share dividends)
• each person has an income tax allowance, which is the amount of income on which no
tax is paid, once this is used up income tax must be paid at the rate dependent upon the
level of income
National insurance contributions (NICs)
• paid by employees (the effect is similar to a tax a on wages) and employers (a tax on employing labour)
Corporation tax (a tax on profits of companies)
Indirect‐——————————–
Value-added tax (VAT)
• a tax on a wide range of goods and services (standard rate is 20%
Excise duties
• a tax on a range of goods and services with negative externalities
Local———————————–
Council tax (local taxes go to local councils)
• a tax on the value of an occupier’s home
Business rates (local taxes go to local councils)
• paid on the value of property owned by businesses, which increases the cost of
production
describe government’s budget?
The UK government has the aim of balancing its budget in the long term however in the short term it may deliberately budget for a surplus or for a Deficit - this is the cause of fiscal policy which uses the government’s budget to affect the economy as a whole in order to meet it’s Macroeconomic objectives
What is fiscal policy ?
Fiscal policy is the use of taxation and government spending to influence the level of economic activity it can be used to achieve one or more of the following objectives: Economic growth Low unemployment price stability A balance in the balance of payments
How can a budget deficit be used to obtain economic objectives
-An increase in government spending->provides incomes for others eg. In the NHS
->As incomes rise they spend more,
-A reduction in taxes->people have more disposable
income ->spend more on goods and services->high levels of economic activity which leads to economic growth and employment
ECONOMIC GROWTH AND LOW UNEMPLOYMENT
What are objectives of fiscal policy.
Economic growth
Low unemployment
Price stability
A balance in the balance of payments
How can a budget surplus be used to achieve economic objectives?
-A decrease in governmentspending eg spending less
in transport
reduced incomes->spendless-> less income
for firms →produce less output, employ less workers
→ total incomes fall→ reverse effect on the economy
As demand falls, there’s less pressure on prices &- DEMAND for imports fall
LESS INFLATION
- Increase in taxes mean less disposable income for tax payers → can’t spend as much→ total demand falls →firms
produce less output, employ less workers→DEMAND for imports fall
HEALTHIER BALANCE OF PAYMENTS
