Fiscal Policy

Question 1

What is the definition of equitable?

Answer 1

-Making things fair, leveling up businesses

Question 2

What is Fiscal policy?

Answer 2

Use of government revenues and taxation to achieve macro targets

Question 3

Fiscal policy is…

Answer 3

A demand side policy

Question 4

If government expenditure is larger than taxes then the economy is in a…

Answer 4

Budget deficit

Question 5

If government expenditure is lower than taxes then the economy is in…

Answer 5

Budget surplus

Question 6

What does the government do when it’s running a budget deficit?

Answer 6

-They borrow money (bonds)
-Leading to an increase in national debt

Question 7

What are fiscal targets?

Answer 7

-Goals to do with government expenditure and revenues that a government sets itself to achieve whilst is in power
-Fiscal targets are able to hold the government accountable for their acitons

Question 8

What is the charter for budget responsibility?

Answer 8

-Requires the OBR to judge whether the government has a greater than 50% chance of meeting its fiscal targets under current policy

Question 9

What is the fiscal mandate?

Answer 9

-the key fiscal target
-requires public sector net debt (excluding Bank of England) as a percentage of GDP to be falling by the fifth year of the rolling forecast period

Question 10

What is the supplementary target?

Answer 10

-requires public sector net borrowing not to exceed 3% of GDP, also by the fifth year of the rolling forecast period in 2028-29

Question 11

what is an expenditure cap?

Answer 11

-set by the treasury
-requires welfare spending (excluding state pension and payments most closely linked to the economic cycle) to be contained within a predetermined cap and margin in 2024-25

Question 12

What is fiscal headroom?

Answer 12

-The difference between the projected debt in 5 years time and the debt ceiling to achieve the fiscal mandates

Question 13

What are two ways to measure debt?

Answer 13

-In £
-Rises every year as government is running a budget deficit
-As a % of GDP
-Specific to a country - more comparable
-This is what’s targeted by Fiscal mandate

Question 14

What are the average weights of taxes

Answer 14

-income
-VAT
-national insurance contribution
-other taxes

Question 15

What are direct taxes?

Answer 15

-levy imposed by the government on the income/wealth generated by an activity

-often discourages the activity
-shifts demand curve
-deflationary

-Income + national insurance tax is approx 400bill
-Corporation tax is relatively small (under 10% of revenues)

Question 16

What are indirect taxes?

Answer 16

-levy imposed by government on the consumption/production of a good/service.
-raises costs for producers which raises the price

-affects supply
-VAT
-Excise duties

Question 17

VAT is levied at…

Answer 17

-the point of consumption
-under 200billion pounds/ 20% of government revenues

Question 18

Excise duties are paid at the point of..

Answer 18

Production
-3% of government revenues

Question 19

What are excise duties?

Answer 19

-taxes on tobacco, fuel and alcohol
-‘sin taxes’

Question 20

Give 2 examples of a proportional tax

Answer 20

-corporate tax
-direct tax

Question 21

Give an example of progressive tax

Answer 21

-direct tax

Question 22

Describe the point of taxes on properties:

Answer 22

-collected by central government and given to local government
-council tax

Question 23

Give an example of tax on economic activity:

Answer 23

-business rates

Question 24

What are the two types of government expenditure?

Answer 24

-Current expenditure (C )
-Investment expenditure (I)

Question 25

What is current expenditure?

Answer 25

-spending on goods and services that provide a benefit in the current time period (typically one year)

Question 26

What is investment expenditure? (I)

Answer 26

-spending on goods and services that provides a benefit in the future

Question 27

What is social protection?

Answer 27

-a form of transfer payments
-40% of government expenditure is transfer payments
-benefits/pensions

Question 28

What is government expenditure in health and education mainly spent on?

Answer 28

-salaries

Question 29

Wear and tear

Answer 29

-the money spent to keep the value of ones investment

Question 30

Give a rough average of the components of government expenditure

Answer 30

• 25% of AD is G
• In the budget it is looked at as 45%
• 25% of G(C) and G(I) and 20% in tariff payments and debt

(AD only contains the G(C+I))

Question 31

What does gross mean?

Answer 31

-total spending on investment
-gross= net + depreciation

Question 32

What is the definition of depreciation?

Answer 32

-the expenditure on maintaining the value of your physical assets

Question 33

Why does the laffer curve have a curved shape?

Answer 33

• As tax rate increases there is more of a disincentive to work
• People will aggressively avoid paying tax
• The very rich will start moving abroad

This will decrease tax revenue

Question 34

What are the four components of public expenditure?

Answer 34

-government expenditure
-consumption expenditure
-transfer payments
-interest of government loans

Question 35

What are transfer payments?

Answer 35

• Governments expenditure on one sided transactions like welfare benefits and pensions
• Associated with promoting equality
• 40% of govt expenditure
• determined by demographic trends (aging population) and the business cycle

Question 36

What is debt interest?

Answer 36

• The governments expenditure on servicing debt that has resulted from decisions made in the past

Question 37

What is non-discretionary government expenditure?

Answer 37

-outside day-to-day control of the government

• transfer payments
• debt interest

Question 38

What is resource crowding out?

Answer 38

• when government expenditure leads to the utilization of scarce resources that the private sector could have used
• has the effect of reducing private sector spending and reducing the positive impact of government spending on AD and growth

Question 39

What is financial crowding out?

Answer 39

• when government spending is financed by additional borrowing
• this increase demand for credit leads to a rise in commercial interest rates
• negatively impacts the ability of the private sector to borrow and invest which in turn reduces the positive impact of government spending on AD and growth

Question 40

What is crowding in?

Answer 40

• by government spending on providision key infrastructure like roads ports and telecoms governments can increase the availability of FoPs for the private sector and remove bottlenecks in supply chains
• stimulates firms to invest and grow

Question 41

What are the 3 different ways to look at the fiscal deficit?

Answer 41

• total budget defict = structural deficit + cyclical deficit
  Govt. not held accountable for part of deficit due to business cycle and hence out of its direct control (cyclical)
• total budget defict = current deficit + net investment
  Borrowing to fund net investment is seen to be sustainable as the costs of repaying the interest and debt is experienced by future gens who also experience the benefits from the investment. So government only held accountable for deficit within current time period
• total budget defict = primary deficit + debt interest
  Government not to be held accountable for cumulative impact of past govt decisions represent by public debt on fiscal deficit (debt interest)