Fiscal Policy Flashcards
The budget framework
budget explains details of fiscal policy and reports on public finances
Annually presented to parliament by the chancellor
Then debated and passed into law
Total managed expenditure
And what its split into
Total spending by the public sector
Split into departmental expenditure limits and annually managed expenditure
What is DELs
Multi year limits on departmental spending
Most is on NHS and transport
Should be fixed but are usually subsequently revised
What are AME’s
Reviewed annually in budget on welfare spending and state pensions for example
What is DEL split into and why
Capital ( investment projects)and current (day to day )
Done to protect capital spending
Spending review
Treasury lead allocation of resources according to gov priorities
How often is spending review
2/3 years
Why is spending review good
Gives certainty to departments on future financing and allows them to look long term with money
OBR created and feature
2010 independent - this is an attempt to improve credibility of fiscal policy
What does obr do
Provides forecasts of fiscal policy that project whether policy has greater than a 50% chance of meeting target
4 obr aims
Evaluate fiscal risk
Judges performance against targets
Assesses long term sustainability of finances
Scrutinises welfare and cost of taxes
Why obr created
As politicians prone to overly positive fiscal forecasts that allowed excessive accumulation of debt
Fiscal rules
PSND must be falling as a percentage of gdp by 5th year of rolling forecast
PSNB must not exceed 3% of gdp
Welfare cap must not be exceeded
Why do we borrow
Inter generational fairness
Funding of public sector
Gradual tax rate adjustment/smoothing
Output stabilisation
What can treasury do to fiscal rules
Suspend rules in the event of -ve economic shock
Positives of fiscal rules
Allows gov not to make unpopular decisions on welfare spending
Forces gov to borrow for good reasons and not to buy votes
Doesn’t allow gov to inflate debt away
5 year rolling forecast period prevents the inappropriate sale of assets in order to reach target
Temp suspensions can increase flexibility
3 percent borrowing limit, limits crowding out effect
Keeps current spending by current revenues
-vets of fiscal rules
Suspensions can means gov don’t take meeting target seriously as they can suspend a lot due to frequent -be shocks
Real interest rates -be so borrowing should be encouraged not limited
Obr has no say in suspensions
Borrowing rule fails to exempt borrowing for investment - as boring is needed for large investment like HS2
Rolling forecast means deadline never comes so public finances can slowly deteriorate
B of e holds 33% of gov debt that isn’t included in debt - presents distorted picture of how much debt country is in
When have there been spikes in gov spending
Covid and world wars
Where was spending after world wars
Around 40 %
who does uk Spend more than and less thab
Why
Spends more than us
Less that Nordic countries - priorities welfare and standard of living
How much centralisation does uk have with gov spending
High degree
Who has low degree of centralisation and why is it good
Switzerland - good bc areas compete with each other and thus allocation of resources is more efficient
Where does gov spend most money
Health and social care
Where does gov spend less money relatively
Defence
Where does uk sit in regards to investment on public infastructure
Lower than oecd average
Who is uk on par with in terms of education results and who’s it worse than
Japan - china
Uk education skill gap vs other country
Vs Korea
Uk has no Change in education results from young and old population
Whereas for Korea - laRGE DISPARITY IN RESULTS BETWEEN old and young population showing Korea has shown vast improvements in education whereas uk has shown none
Uk trends in education
Increased under Blair government
Plateaued under coalition and Tory government
What is the stat to show employers dissatisfaction with eduction
In 2019 Quarter of employers reported that they were unimpressed with literacy and numerical skills of new workers
Which tax is most harmful for growth
Corporation tax
What was increase in corperation tax
2023 = 19% to 25%
What was effect of increasing corp tax
Still lowest out of G7 countries but decreased international competitiveness
What happened between 2021 - 2023 for corp tax
130% capital allowance for investment into machinery and plant assets
What happened between 2023 -2026 in regards to tax
100% capital allowance on new machinery and plant assets
What did these new capital allowances do
Increase uk international competitiveness as they became the friendliest for that sector
Which should incentivise investment and fdi
What funded uk deficit pre GFC
Fdi
How much did investment increase by for superdeduction
Increase by 5%
What do they predict 100% capital allowance will do for investment
Increase by 3% within 3 years
How much of adult population pay taxes and why
63% due to personal allowance
What is the biggest tax revenue stream
Income tax
What does increasing tax do
Decrease fdi
Decrease incentive to work so increased unemployment
Who pays most tax
Highest earners
What do bottom 10%of earners contribute the most to
Indirect taxes
Stat on bottom 20% of earners
Receive more money from gov than they give back
When were there tax peaks
After world wars and not reversed afterwards
Where is uk for taxes
Around oecd average but lower than Nordic countries due to high public spending
Where is uk for taxes on average people
Lower than oecd average
What happened in 1988 for taxes
Simplified and reduced
What happened when gfc hit in regards to debt
Gov debt to gdp ratio doubled
What were implications of fiscal consolidation
borrowing would have reached 10% of national income (synthetic) by end of 2010s
Whereas instead borrowing reached 0% of national income
What still happened when fiscal consolidation occurred
Gov gross debt % of gdp increased
What happened to PSND after spikes
Pre level spikes have not been reached after spikes have occurred
What state was uk financials in pre gfc and after
Already in deficit pre gfc whereas a lot of countries weren’t
Gfc massively increased deficit further
Problems with national accounts
Exclude some liabilities creating a distorted image of UK’s true financials
What is WGA and National accounts gov net debt ratios
WGA = 133%
National accounts = 85%
what did imf create
Created a graph to show net worth of countries
Uk at bottom of list behind Greece and Italy and Ireland whereas Norway at the top
What is happening to tax and benefits system over time
Slowly and stealthily changing due to thresholds that have been frozen or a temporary or permernant period
What is effect when something is frozen for longer
Increased effect of cpi updating it
Additional rate threshold stat
2010 = 150,000 threshold
2022= 1930000 if cpi updated it
Vat registration threshold stat
2010 - 85,000
2022 - 94,500
Problem with vat threshold not being updated
Increased number of firms paying vat thus decreasing growth
What do freezes do to gov and households
Decrease household income and increase gov financing
Where is inflation at
Around 10%
What has inflation caused with freezes
Greater effect due to freezes than original potentially intended
What can freezes do to work incentive
Decrease work incentive - income effect
Increase work incentive - substitution effect
How does freezes affect number of tax payers and stat
Increases number of tax payers due to personal allowance not being uprated
Today 63% of adults play tax whereas if cpi uprated allowance then only 59% of adults pay tax
What should happen to thresholds
Be banded with an index so rates move automatically
What’s problem with benefit cap and stats
Cap is at 20,000 whereas it should be at 22,500- this increases number of families affected by the cap and thus creates problem with families trying to escape poverty cycle
How many families will be affected by benefits cap and when
By 2025 - 250,000 affected families by cap
What freezes are the most harmful
Temporary freezes - most of which were made by Rishi Sunak
Problems with freezes
Hidden and stealthy
Gov increase tax revenue but give out less benefits
Value of befits decreases
Decrease transparency from gov
Real impact of freezes unknown potentially due to high inflation
Policy uncertainty - freezes will need to reform in future and how much to reform them by can be tricky
Why are freezes better for gov
Increase tax revenue without openly increasing tax rate as increased tax rates are unpopular and can lose parties votes
What percentage is governemnt debt of gdp
99.2 percent
Why is current labour force productivity low
Majority of gov spending on welfare or state pensions and not on current workforce thus incentive to work lower
