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economics > Fiscal Policy > Flashcards

Fiscal Policy Flashcards

1
Q
A
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2
Q

what is fiscal policy

A

making deliberate changes in government spending or taxation

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3
Q

how is G financed

A

taxation revenue

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4
Q

budget balance

A

the difference between govt spending and collected tax revenue

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5
Q

how are budget deficits financed

A

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

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6
Q

direct tax

A

placed on incomes and often taken away by the employeri

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7
Q

indirect tax

A

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

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8
Q

progressive tax

A

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

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9
Q

why is it progressive

A

tax is paid only on additional income earned

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10
Q

regressive tax

A

taxes that increase in relative size4 on lower income earners

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11
Q

examples of a regressive taxx

A

VAT

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12
Q

proportional tax

A

‘flat’ taxes
one rate of taxes/ equal

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13
Q

3 main taxes

A

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

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14
Q

advantages and disadvantages of income tax

A

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

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15
Q

adv + disadv of VAT

A

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

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16
Q

why govt levy tax

A

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)

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17
Q

horizontal equity

A

people with similar income pay similar income tax

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18
Q

vertical equity

A

tax is payed based on ability to pay

19
Q

curent spending

A

day to day e.g salaries for public sector workers

20
Q

capital spending

A

investment

21
Q

expansionary fiscal policy

A

increases in govt spending and lower taxation
shifts AD rightward

22
Q

contractionary fiscal policy

A

decrease in govt spending and tax rises shifts AD leftwards

23
Q

fiscal policy changes which macroeconomic factors

A

level of real GDP
unemployment
price level
multiplier effects

24
Q

effects of tax changes

A

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

25
Q

effects of changes in indirect taxes

A

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

26
Q

supply side fiscal policy

A

changes in fiscal policy to improve the LRAS of the economy

27
Q

supply side fiscal policies include

A

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

28
Q

micro impact of fiscal policy

A

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

29
Q

fiscal stance

A

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

30
Q

what does expansionary policy effect the bdget

A

brings it closer to a deficit

31
Q

what else impacts budget deficit

A

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

32
Q

cyclical budget deficit

A

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

33
Q

structural budget deficit

A

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

34
Q

cyclical deficit e.g.

A

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

35
Q

how are cyclical vs structural deficits lifted

A

cyclical - eventually eliminated by economic growth returning to avg rate

structural - only if contractionary fiscal policy is implemented

36
Q

impacts on economic growth of budget deficit/surpluses

A

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)

37
Q

impact of budget on unemployment

A

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

38
Q

impact of budget on inflation

A

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

39
Q

how does the govt finance the budget deficit

A

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

40
Q

debt interest payed in 2019-2020 uk

A

£40 billion

41
Q

uk national debt in 2019

A

£1.8 trillion (almost 85% if GDP)

42
Q

why is the national debt significant

A

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

43
Q

OBR functions

A

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

44
Q
A

economics (33 decks)

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