Fiscal policy Flashcards

1
Q

What does fiscal policy concern

A

Taxation and government spending

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2
Q

What is a budget deficit

A

A budget deficit means the government has borrowed money and its expenditure exceeded its national income

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3
Q

What is national debt

A

All the previous budget deficits added together

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4
Q

Give two examples of scenarios which worsened national debt

A
  • Covid - Furlough payments
  • 2008 banking crisis - the government ‘bailed’ banks out
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5
Q

Give 4 examples of taxes on incomes

A

Inheritance tax
Capital gains tax
National insurance
Corporation tax

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6
Q

Which curve shows whether income tax leads to greater tax revenue

A

The laffer curve

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7
Q

What is on the X and Y axis of the Laffer curve

A

X - Tax rate (0-100%)
Y - Tax revenue

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8
Q

Draw the laffer curve

A

In notes

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9
Q

What does the point t on the laffer curve represent

A

t = maximum tax revenue, beyond which, tax revenue begins to fall

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10
Q

Give 3 reasons why tax revenue may decrease with an increasing tax rate (after point t on the laffer curve)

A
  • Tax avoidance
  • Tax evasion
  • Lack of incentive to work
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11
Q

What are two examples of tax avoidance

A

Leaving the country (brain drain)
Tax planning (using an accountant)

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12
Q

How does an increase in the tax rate decrease the incentive to work

A

Less incentive to seek promotions and less entrepreneurship due to less financial rewards

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13
Q

How does less entrepreneurship due to increased tax revenue affect the government

A

Less corporation tax
Less growth
Less employment

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14
Q

What is the free market argument for cutting taxes

A

Free market economists often argue income tax rates are above point t on the laffer curve, therefore cutting taxes would increase tax revenue

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15
Q

What is the multiplier effect

A

An increase in spending leads to a greater increase in income (national)

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16
Q

What is the numerical multiplier

A

1/MPS OR 1/1-MPC

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17
Q

What does MPS and MPC stand for

A

Marginal propensity to consume/save

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18
Q

What is austerity

A

Cutting spending or increasing tax in order to reduce a budget deficit

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19
Q

What is a direct tax

A

A tax on any form of income

20
Q

What is an indirect tax

A

A tax on spending

21
Q

What is a progressive tax

A

A tax which taxes a higher proportion of income from higher income earners

22
Q

What is a regressive tax

A

A tax which takes a greater proportion of income from lower income earners

23
Q

What are 3 advantages of a regressive/indirect tax

A
  • Doesn’t take away the incentive to work/ earn income
  • Helps reduce consumption of demerit goods
  • Higher income earner still pay more tax in absolute terms
24
Q

Give two examples of how regressive/indirect taxes reduce the consumption of demerit goods

A

Sugar tax
Excise duties

25
Q

Explain how regressive/indirect taxes still mean higher income earners pay more tax in absolute terms

A

-Higher income earners do more total spending
-Hence they pay more in VAT
- Especially since VAT is not on necessity goods such as basic food items and children’s clothes (which low income earners would buy more of)

26
Q

What are two negatives of regressive/indirect taxes

A
  • Higher income earners have a lower MPC, and therefore are likely to spend less income meaning less VAT paid
  • Low income groups have a higher propensity to gamble/smoke/drink which leads to more regressive taxes paid
27
Q

What are two arguments for progressive/direct taxes

A
  • They can be justified by arguing there is a diminishing marginal utility of money
  • Very high income earners may only save or buy luxury goods (do not need it)
28
Q

What two categories can government spending be broken down into

A

Capital spending
Current spending

29
Q

What is capital spending

A

Spending by the government that generates a return (investment spending)

30
Q

Give 3 examples of capital spending

A

Roads
Hospitals
Schools

31
Q

What is current spending

A

Day to day spending on expenses

32
Q

Give two examples of current spending

A

Public sector wages (Bin men, NHS doctors)
Welfare spending (Benefits)

33
Q

What is a common cap target for a governments budget deficit

A

Governments try to keep the budget deficit to no more than 3% of GDP. In the financial year 23/34, the UKs was 4.4%

34
Q

What is the ‘golden rule’ to do with government spending

A

Governments will only borrow to fund capital spending, not to cover current spending

35
Q

Why the ‘golden rule’ to do with government spending justified

A

As capital spending generates a return which can cover the interest which needs to be paid for borrowing

36
Q

What is a cyclical budget deficit

A

Caused by fluctuations in the economic cycle, in a recession VAT is lower, tax revenue is lower, more spending on benefits and less AD in the economy

37
Q

Why is a cyclical budget deficit not seen as too problematic

A

As the economic cycle shows that as an economy moves back into the recovery phase, AD will increase again

38
Q

What is a structural budget deficit

A

When a country is living beyond its means either due to too much government spending or taxes are too low

39
Q

Who are the OBR

A

Office for Budget Responsibility
Independent reviewers of the government tax and spending plans

40
Q

What are 4 objectives of fiscal policy

A

Reduce poverty
Promote strong, sustainable growth
Value for money for the tax payer
Ensure sustainable public finances

41
Q

What is expansionary fiscal policy

A

Decreasing tax and increasing government spending

42
Q

How does expansionary fiscal policy affect a budget deficit in the SR and LR

A

In the short run the budget deficit worsens, in the long run, it decreases due to more AD

43
Q

What is contractionary fiscal policy

A

Increasing tax and less government spending

44
Q

What is Keynesian economics

A

Argues that demand drives supply and healthy economy’s spend/invest more than they save

45
Q
A