Fiscal Policy

Question 2

what is fiscal policy

Answer 2

making deliberate changes in government spending or taxation

Question 3

how is G financed

Answer 3

taxation revenue

Question 4

budget balance

Answer 4

the difference between govt spending and collected tax revenue

Question 5

how are budget deficits financed

Answer 5

borrowing in the shortfall
govt issues bonds and people purchase them
bonds pay the holder a fixed rate of interest until repaid

Question 6

direct tax

Answer 6

placed on incomes and often taken away by the employeri

Question 7

indirect tax

Answer 7

paced on expenditure
part of the selling price which is not kept by the seller but collected by the govt

Question 8

progressive tax

Answer 8

where those on higher incomes pay a higher proportion of their income in tax compared to those on lower incomes

Question 9

why is it progressive

Answer 9

tax is paid only on additional income earned

Question 10

regressive tax

Answer 10

taxes that increase in relative size4 on lower income earners

Question 11

examples of a regressive taxx

Answer 11

VAT

Question 12

proportional tax

Answer 12

‘flat’ taxes
one rate of taxes/ equal

Question 13

3 main taxes

Answer 13

income tax
national insurance (varies with pension type)
VAT (20%)

Question 14

advantages and disadvantages of income tax

Answer 14

a- fair, alleviate relative poverty
d- disincemntive to work, complex to administer, encourages tax avoidance

Question 15

adv + disadv of VAT

Answer 15

a- hard to avoid
d-regressive, changes can be inflationary

Question 16

why govt levy tax

Answer 16

raise revenue to finance expenditure (avg £800m a year)

change patterns of economic activity e.g lower taxes on renewable energy

discourage consumption of demerit goods - difficult if price inelastic

redistribute income (progressive)

Question 17

horizontal equity

Answer 17

people with similar income pay similar income tax

Question 18

vertical equity

Answer 18

tax is payed based on ability to pay

Question 19

curent spending

Answer 19

day to day e.g salaries for public sector workers

Question 20

capital spending

Answer 20

investment

Question 21

expansionary fiscal policy

Answer 21

increases in govt spending and lower taxation
shifts AD rightward

Question 22

contractionary fiscal policy

Answer 22

decrease in govt spending and tax rises shifts AD leftwards

Question 23

fiscal policy changes which macroeconomic factors

Answer 23

level of real GDP
unemployment
price level
multiplier effects

Question 24

effects of tax changes

Answer 24

changes disposable income of households which impacts C

taxes on business profits will impact I

tax cuts may lead to higher saving and not impact C

decrease or increase AD

Question 25

effects of changes in indirect taxes

Answer 25

any increase in indirect tax e.g. VAT will shift SRAS leftward as higher indirect taxes cannot always be fully passed on to the consumer in he form of higher prices, so profit margins fall on output sold this may reduce the incentive for firms to supply output at any price level

Question 26

supply side fiscal policy

Answer 26

changes in fiscal policy to improve the LRAS of the economy

Question 27

supply side fiscal policies include

Answer 27

govt spending on increasing production capacity and shifting LRAS right (e.g infrastructure spending) tax incentives to encourage firms to employ workers and increase investment spending (reducing corp tax) reducing direct tax to make work more attractive

Question 28

micro impact of fiscal policy

Answer 28

govt spending on subsidies for merit goods with positive externalities indirect taxes to discourage consumption of demerit goods changing pattern of economic activity e.g declining industries and subsidising their costs

Question 29

fiscal stance

Answer 29

the extent to which fiscal policy is likely to add or subtract from AD

Question 30

what does expansionary policy effect the bdget

Answer 30

brings it closer to a deficit

Question 31

what else impacts budget deficit

Answer 31

rate of economic growth tax revenue collected higher unemployment = higher govt welfare expenditure

Question 32

cyclical budget deficit

Answer 32

the portion of a budget deficit that changes when the rate of economic growth changes

Question 33

structural budget deficit

Answer 33

portion of the budget deficit that remains even if economic growth is at its normal long run rate

Question 34

cyclical deficit e.g.

Answer 34

2009 recession 2010 govt attempted to reduce large budget deficit also sectoral deficit where govt expenditure would have exceeded tax revenue regardless of rate of economic growth

Question 35

how are cyclical vs structural deficits lifted

Answer 35

cyclical - eventually eliminated by economic growth returning to avg rate structural - only if contractionary fiscal policy is implemented

Question 36

impacts on economic growth of budget deficit/surpluses

Answer 36

budget deficit = policy is increasing AD AD changes will affect short run economic growth however the rate of EG if slow will require high welfare expenditure and less tax revenue collected (low economic growth may have caused the deficit)

Question 37

impact of budget on unemployment

Answer 37

govt can reduce unemployment through expansionary fiscal policy higher govt spending and larger deficit = higher demand for workers however in the long run unemployment will return to its natural rate and will be independent of budgetary policy

Question 38

impact of budget on inflation

Answer 38

excessive AD= demand pull inflation which is the result of expansionary rise in budget surplus (tax rises and govt cuts) will reduce demand pull

Question 39

how does the govt finance the budget deficit

Answer 39

borrow in the shortfall bonds are issued and eventually repaid but they form part of the national debt

Question 40

debt interest payed in 2019-2020 uk

Answer 40

£40 billion

Question 41

uk national debt in 2019

Answer 41

£1.8 trillion (almost 85% if GDP)

Question 42

why is the national debt significant

Answer 42

a large national debt will require greater interest and govt must make a choice on how to repay those who buy govt bonds will demand higher IR on the debt if there is the threat of an uncontrollable debt the national debt as a % of GDP will fall if the rate at which it grows is less than the rate GDP grows

Question 43

OBR functions

Answer 43

economic forecasting of govt finances evaluating fiscal policy analysis of the sustainability of public finances analysis of tax and welfare costing