Fiscal Policy Flashcards
Expansionary fiscal policy
The decreasing of taxation to
increase AD
Promote sustainable growth
Reduce unemployment and inequality
Cause a very high inflation if not checked ( demand pull inflation)
Contractionary policy
Taxation increase in order to
reduce AD
And decrease inflation
Can cause damage to employment and equality
Example methods of contractionary fiscal policy
Income tax increase
Corporate tax increase
Windfall tax and council tax increase
What is the gov budget deficit
Difference between taxation revenue and government spending
Tax Revenue > gov spending - budget surplus
Tax revenue < gov spending - budget deficit
Example diagram laffer curve
In pandemic how much was government budget deficit at a percentage of GDP
Borrowed 15% of GDP around £300bn
What was uk national debt before and after COVID
80% of GDP
To
Around 100% of GDP
What did the Truss/ Kwarteng mini budget cause
Speculating that the UK government could go bankrupt
Therefore panking selling of bonds which drove up bond interest rates +3%
Panik selling of pound therefore devaluated the pound weakened
What has richi Sunak done since taking over and why
Heavy contractionary policies tax rises
To reduce budget deficits and reduce national dept
What is fiscal drag
Where due to the freezing of tax band people are paying higher tax as they enter new higher tax bands therefore making them worse off as they must pay higher taxation
What are the axis on laffer curve and what does it show
Government revenue y axis
Tax rate x axis
Point t is where the government can get peak revenue from the highest tax rate however after that workers are deincentivized to work and are better off claiming benefits
How can the budget deficit be recovered by policies
Fiscal poilcy - increases in taxation or a play on fiscal drag can make more revenue for government to help reduce deficit
Supply side policies- increasing g education can bring more investment and AD rise causing growth and reduction in the deficit ( with tax increase)
