Fiscal Policy Flashcards
What is fiscal policy
The use of G and T to control the economy
What is the aim of supply side fiscal policy
To improve the supply side of the economy, thereby making UK firms more competitive on world markets
What is the structure of the UK budget
Biggest G on health, social protection, education
Where does the UK government generate the most tax revenue
- Income tax
- VAT
- national insurance contributions
What is the laffer curve
A diagram which models the impact on government revenue of changing tax rates - (there is a tax rate where G is maximised) it’s an upside down parabola stopping at the x axis
What is current expenditure
Government spending on day to day things like wages of people in the public sector ie nurses.
Shifts AD
What is capital expenditure
G on infrastructure projects or things to shift LRAS
What are transfer payments
Payments from govt which doesn’t itself generate any output or income. Eg JSA
What is the difference between indirect and direct taxes
Change in direct tax impacts the proportion of income that is retained by households and businesses, in turn influencing spending through AD.
Changes in indirect taxes will be passed on to consumers via price changes. It doesn’t change the amount of income individuals actually have
What do Keynesian economists believe about fiscal policy
That it should be used as a tool to help control the business cycle. If the economy is experiencing a recession, Government should employ expansionary fiscal policy
Evaluation of demand side fiscal policy
How effective is decreasing tax rates to promote C in a recession where confidence is low
Can lead to public sector debt if recession is more common or long lasting than boom
May lead to crowing out
What is crowding out
When government spending fails to increase overall AD because higher G causes an equivalent fall in private sector spending and investment
Evaluation of supply side fiscal policy
May lead to crowding out
Opportunity cost, ie with HS2 which isn’t even happening anymore
How can fiscal policy achieve other government objectives
Reduce national debt via contractionary policy
Taxes on imports (tariffs) can be used to help balance the current account
Inflation can be controlled via demand side fiscal policy
How do automatic fiscal stabilisers work
If the economy is growing, people will automatically pay more taxes via income tax and VAT and the government have to spend less on unemployment benefits. Increased T and lower G keeps AD in check. It dampens down the extremities of a boom or bust
