Fiscal Policy

Question 1

Government spending (Major areas)

Answer 1

Social protection - Provide everyone with the basic minimum standard of living and reduces inequality in the distribution of income. Eg: state pension, child benefits
Health - Increase the welfare of the population
Education - Increase the welfare of the population

Question 2

Direct tax

Answer 2

A tax on income or wealth

Question 3

Government spending

Answer 3

The total amount of money of spent by the government in a given period time

Question 4

Government revenue

Answer 4

The source of finance for government spending

Question 5

Indirect tax

Answer 5

A tax on spending often defined as a tax on good and service

Question 6

Direct tax (examples)

Answer 6

Income tax - collects the most revenue. Each person has a income tax allowance where no tax is paid. Once allowance passed, tax must be paid at the rate dependent upon the level income.
Nation insurance contributions - paid by employees and employers, tax on employing labour
Corporation tax - tax on profits of companies

Question 7

Indirect tax (examples)

Answer 7

VAT - Value added tax - tax on a range of goods and services

Excise duties - tax on specific range of goods, demerit goods

Question 8

Balanced government budget

Answer 8

Tax revenue is equal to government spending

Question 9

Budget deficit

Answer 9

Government spending is greater than tax revenue

Question 10

Budget surplus

Answer 10

Tax revenue is greater than government spending

Question 11

Fiscal policy

Answer 11

A policy that uses government spending and taxation to affect the economy as a whole

Question 12

Fiscal policy objectives

Answer 12

Economic Growth
Low Unemployment
Price Stability
A balance in the balance of payments

Question 13

How can a budget deficit be used to achieve economic objectives?

Answer 13

Increase government spending or reduce taxes.

Use a budget deficit in a recession with high unemployment and a lack of economic growth.

Question 14

Increase government spending

Causes

Answer 14

Extra spending provides income for others.
Eg : Government spend money on NHS, NHS employ more workers, more wages. As income rises, spending rises and firms produce extra output and employ more workers to meet demands.

Question 15

A reduction in taxes

Causes

Answer 15

More disposable income. Able to spend more and total demand rises. Firms need to increase output to meet new demands so they employ more workers.

Question 16

How can a budget surplus be used to achieve economic objectives?

Answer 16

Reducing government spending or increase tax

Use a budget surplus when there is too much inflation or a large balance of payments deficit

Question 17

Decrease government spending

Causes

Answer 17

Reduce spending, reduces income in the economy. Consumers spend less, so less income for firms. Less income for firms means they will produce less and lay off workers. Total income decreases so demand falls so less pressure on prices and demands for imports fall.

Question 18

A increase in tax

Causes

Answer 18

Increase tax, less disposable income. Less spending so total demand falls. Firms will produce less output and employ less workers so total income will fall. Total demand falls so less pressure on process and demands for imports falls

Question 19

Costs and benefits of fiscal policy

Answer 19

Budget deficit increase disposable income, but doesn’t guarantee that consumers will spend all this extra money.
As disposable income rises, extra income may be spent on imported good and services leading to a larger balance of payments deficit
Budget deficit leads to a rise in total demand, supply rises to meet demand. If supply cannot meet demand, it will cause inflation to rise

Question 20

Opportunity cost and fiscal policy

Answer 20

• Government spends on health and education to maintain a balanced budget. Opportunity cost of spending on health and education is spending less on other areas such as defence. So either the government has to give up spending on other areas, or consumer have to give up spending due to higher tax to fund those other areas.
• If government cut income tax rates, tax revenue falls while promising not to raise other taxes, this leads to a budget deficit or less government spending.

Question 21

Income and wealth redistribution

Answer 21

Government actions using mainly taxation and benefits to reduce inequalities of income and wealth

Question 22

Progressive tax

Answer 22

A tax which takes a greater percentage of tax the higher income

Question 23

Inheritance tax

Answer 23

Tax on the assets of a person upon death.

Can be used for the redistribution of wealth

Question 24

Reducing indirect tax

Redistribution

Answer 24

To redistribute income in favour of lower income groups. Lower indirect tax on goods to lower the price. However government may not be willing to do this for goods that are costly to society. UK government don’t place tax on necessities including food.

Question 25

Government spending and redistribution

Answer 25

Spend on social protection which benefits lower income groups. More disposable income.

Question 26

Consequences of redistribution measures

Answer 26

• People find ways they can live well enough on benefits provided by the government. Disincentive to work if post tax income from work is not much higher than benefits gained by not working.
• People make decision based upon the effect of direct taxes. Reluctant to apply for higher paid jobs
• High earners may move abroad to escape tax
• High direct tax may act as a disincentive for business to invest
• Saving decisions are also affected as people may not save if a lot of their income is taxed.

Question 27

How fiscal policy can be used to achieve economic objectives?
(Economic Growth)

Answer 27

Budget deficit - Increase Government spending - Reduced tax - Increase spending, output and employment

Question 28

How fiscal policy can be used to achieve economic objective?

Low unemployment

Answer 28

Budget deficit - Increased Government spending - Reduce tax - Increase spending, output and employment

Question 29

How fiscal policy can be used to achieve economic objective?

Price stability

Answer 29

Budget surplus - Reduced Government spending - Increase tax - Reduced spending, so less pressure on price level

Question 30

How fiscal policy can be used to achieve economic objective?

A healthier balance of payment

Answer 30

Budget surplus - Reduced Government spending - Increase tax - Reduce spending, including spending on imports