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Economic policy > Fiscal Policy > Flashcards

Fiscal Policy Flashcards

1
Q

The budget framework

A

budget explains details of fiscal policy and reports on public finances

Annually presented to parliament by the chancellor

Then debated and passed into law

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2
Q

Total managed expenditure

And what its split into

A

Total spending by the public sector

Split into departmental expenditure limits and annually managed expenditure

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3
Q

What is DELs

A

Multi year limits on departmental spending

Most is on NHS and transport

Should be fixed but are usually subsequently revised

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4
Q

What are AME’s

A

Reviewed annually in budget on welfare spending and state pensions for example

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5
Q

What is DEL split into and why

A

Capital ( investment projects)and current (day to day )

Done to protect capital spending

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6
Q

Spending review

A

Treasury lead allocation of resources according to gov priorities

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7
Q

How often is spending review

A

2/3 years

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8
Q

Why is spending review good

A

Gives certainty to departments on future financing and allows them to look long term with money

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9
Q

OBR created and feature

A

2010 independent - this is an attempt to improve credibility of fiscal policy

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10
Q

What does obr do

A

Provides forecasts of fiscal policy that project whether policy has greater than a 50% chance of meeting target

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11
Q

4 obr aims

A

Evaluate fiscal risk
Judges performance against targets
Assesses long term sustainability of finances
Scrutinises welfare and cost of taxes

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12
Q

Why obr created

A

As politicians prone to overly positive fiscal forecasts that allowed excessive accumulation of debt

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13
Q

Fiscal rules

A

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

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14
Q

Why do we borrow

A

Inter generational fairness

Funding of public sector

Gradual tax rate adjustment/smoothing

Output stabilisation

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15
Q

What can treasury do to fiscal rules

A

Suspend rules in the event of -ve economic shock

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16
Q

Positives of fiscal rules

A

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

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17
Q

-vets of fiscal rules

A

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

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18
Q

When have there been spikes in gov spending

A

Covid and world wars

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19
Q

Where was spending after world wars

A

Around 40 %

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20
Q

who does uk Spend more than and less thab

Why

A

Spends more than us

Less that Nordic countries - priorities welfare and standard of living

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21
Q

How much centralisation does uk have with gov spending

A

High degree

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22
Q

Who has low degree of centralisation and why is it good

A

Switzerland - good bc areas compete with each other and thus allocation of resources is more efficient

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23
Q

Where does gov spend most money

A

Health and social care

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24
Q

Where does gov spend less money relatively

A

Defence

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25
Q

Where does uk sit in regards to investment on public infastructure

A

Lower than oecd average

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26
Q

Who is uk on par with in terms of education results and who’s it worse than

A

Japan - china

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27
Q

Uk education skill gap vs other country

A

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

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28
Q

Uk trends in education

A

Increased under Blair government

Plateaued under coalition and Tory government

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29
Q

What is the stat to show employers dissatisfaction with eduction

A

In 2019 Quarter of employers reported that they were unimpressed with literacy and numerical skills of new workers

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30
Q

Which tax is most harmful for growth

A

Corporation tax

31
Q

What was increase in corperation tax

A

2023 = 19% to 25%

32
Q

What was effect of increasing corp tax

A

Still lowest out of G7 countries but decreased international competitiveness

33
Q

What happened between 2021 - 2023 for corp tax

A

130% capital allowance for investment into machinery and plant assets

34
Q

What happened between 2023 -2026 in regards to tax

A

100% capital allowance on new machinery and plant assets

35
Q

What did these new capital allowances do

A

Increase uk international competitiveness as they became the friendliest for that sector

Which should incentivise investment and fdi

36
Q

What funded uk deficit pre GFC

A

Fdi

37
Q

How much did investment increase by for superdeduction

A

Increase by 5%

38
Q

What do they predict 100% capital allowance will do for investment

A

Increase by 3% within 3 years

39
Q

How much of adult population pay taxes and why

A

63% due to personal allowance

40
Q

What is the biggest tax revenue stream

A

Income tax

41
Q

What does increasing tax do

A

Decrease fdi

Decrease incentive to work so increased unemployment

42
Q

Who pays most tax

A

Highest earners

43
Q

What do bottom 10%of earners contribute the most to

A

Indirect taxes

44
Q

Stat on bottom 20% of earners

A

Receive more money from gov than they give back

45
Q

When were there tax peaks

A

After world wars and not reversed afterwards

46
Q

Where is uk for taxes

A

Around oecd average but lower than Nordic countries due to high public spending

47
Q

Where is uk for taxes on average people

A

Lower than oecd average

48
Q

What happened in 1988 for taxes

A

Simplified and reduced

49
Q

What happened when gfc hit in regards to debt

A

Gov debt to gdp ratio doubled

50
Q

What were implications of fiscal consolidation

A

borrowing would have reached 10% of national income (synthetic) by end of 2010s

Whereas instead borrowing reached 0% of national income

51
Q

What still happened when fiscal consolidation occurred

A

Gov gross debt % of gdp increased

52
Q

What happened to PSND after spikes

A

Pre level spikes have not been reached after spikes have occurred

53
Q

What state was uk financials in pre gfc and after

A

Already in deficit pre gfc whereas a lot of countries weren’t

Gfc massively increased deficit further

54
Q

Problems with national accounts

A

Exclude some liabilities creating a distorted image of UK’s true financials

55
Q

What is WGA and National accounts gov net debt ratios

A

WGA = 133%
National accounts = 85%

56
Q

what did imf create

A

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

57
Q

What is happening to tax and benefits system over time

A

Slowly and stealthily changing due to thresholds that have been frozen or a temporary or permernant period

58
Q

What is effect when something is frozen for longer

A

Increased effect of cpi updating it

59
Q

Additional rate threshold stat

A

2010 = 150,000 threshold

2022= 1930000 if cpi updated it

60
Q

Vat registration threshold stat

A

2010 - 85,000

2022 - 94,500

61
Q

Problem with vat threshold not being updated

A

Increased number of firms paying vat thus decreasing growth

62
Q

What do freezes do to gov and households

A

Decrease household income and increase gov financing

63
Q

Where is inflation at

A

Around 10%

64
Q

What has inflation caused with freezes

A

Greater effect due to freezes than original potentially intended

65
Q

What can freezes do to work incentive

A

Decrease work incentive - income effect

Increase work incentive - substitution effect

66
Q

How does freezes affect number of tax payers and stat

A

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

67
Q

What should happen to thresholds

A

Be banded with an index so rates move automatically

68
Q

What’s problem with benefit cap and stats

A

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

69
Q

How many families will be affected by benefits cap and when

A

By 2025 - 250,000 affected families by cap

70
Q

What freezes are the most harmful

A

Temporary freezes - most of which were made by Rishi Sunak

71
Q

Problems with freezes

A

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

72
Q

Why are freezes better for gov

A

Increase tax revenue without openly increasing tax rate as increased tax rates are unpopular and can lose parties votes

73
Q

What percentage is governemnt debt of gdp

A

99.2 percent

74
Q

Why is current labour force productivity low

A

Majority of gov spending on welfare or state pensions and not on current workforce thus incentive to work lower

Economic policy (3 decks)

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