FISCAL POLICY Flashcards
What is fiscal policy ?
The GOVT’s use of spending , direct and indirect taxes , borrowing etc to affect the level of AD and growth
What is the public sector ?
Businesses owned by the GOVT - whereas the private sector is privately owned
Give examples of public sector corporations ?
Met office
OS
Channel 4
Network rail
Royal mail until 2013
What is the key role of Fiscal policy ?
Finance GOVT spending
Provide welfare state security
Manage the economic cycle
Tackle market failures
Change final income and wealth
What is GOVT spending ?
Spending by the public sector on goods and services such as education health care and defence
What is GOVT current spending ?
The spending on public services
Salaries of NHS workers
Drugs used in healthcare
Road maintenance
Army logistics
What is GOVT capital spending ?
Spending on new public infrastructure
Building new motorways
New NHS equipment
Extra defence equipment
Flood defence schemes
What is the economic importance of GOVT spending ?
Key component of AD
Big regional impact of economy
Providing public and merit goods
Achieving greater equity
What is the economic importance of education spending ?
May increase the skills and productivity of workers
Improvement of human capital can lower structural unemployment
More innovation / competitiveness
What is the economic importance of healthcare spending ?
Improved health outcomes will boost active labour supply
Increased productivity
Lessened risk of relative poverty
What are direct taxes ?
Taxes that cannot be legally shifted by the person legally liable to shift the tax onto someone else . Levied on income and wealth
What is proportional tax ?
Proportion of tax paid stays the same as the income rises
What is regressive tax ?
Proportion of income paid in tax falls as incomes increase
What are indirect taxes ?
Tax that can be shifted by the person legally liable to pay the tax onto someone else ( via raising the price of good being sold by the taxpayer )
What is progressive tax?
Proportion of income paid in taxes rises as income rise
How does tax rates affect aggregate demand ?
It affects :
Income and disposable income
Corporation tax + business investments
National income and labour demand
Vat levels and consumer spending
Taxation and business r and d spending
What is expansionary fiscal policy ?
Policy with aims to increase AD
What are some examples of expansionary fiscal policy in action ?
Cut in income tax - boosts disposable income - adds to consumer demand
Cut in indirect taxes - lower prices - higher real income - adds to consumer demand
Cut in corporation tax - higher post tax profits - adds to business capital spending
What is the effect of lower corporation tax on business ?
Businesses keep larger profits
Rise in planned investment
Increase in capital spending if they inject into the CFI
Creates multiplier effect on demand output and employment
