Fiscal policy

Question 1

What does fiscal policy concern

Answer 1

Taxation and government spending

Question 2

What is a budget deficit

Answer 2

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

Question 3

What is national debt

Answer 3

All the previous budget deficits added together

Question 4

Give 3 examples of scenarios which worsened national debt

Answer 4

• Covid - Furlough payments
• 2008 banking crisis - the government ‘bailed’ banks out
• Cost of living crisis - winter fuel payments

Question 5

Give 4 examples of taxes on incomes

Answer 5

Inheritance tax
Capital gains tax
National insurance
Corporation tax

Question 6

Which curve shows whether income tax leads to greater tax revenue

Answer 6

The laffer curve

Question 7

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

Answer 7

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

Question 8

Draw the laffer curve

Answer 8

Question 9

What does the point t on the laffer curve represent

Answer 9

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

Question 10

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

Answer 10

• Tax avoidance
• Tax evasion
• Lack of incentive to work

Question 11

What are two examples of tax avoidance

Answer 11

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

Question 12

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

Answer 12

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

Question 13

How does less entrepreneurship due to increased tax revenue affect the government (3 effects)

Answer 13

Less corporation tax
Less growth
Less employment
Less private sector investment
Less N.I tax (recent budget)

Question 14

What is the free market argument for cutting taxes

Answer 14

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

Question 15

What is the multiplier effect

Answer 15

An increase in government spending leads to a greater increase in national income

Question 16

What is the numerical multiplier

Answer 16

1/MPS OR 1/1-MPC

Question 17

What does MPS and MPC stand for

Answer 17

Marginal propensity to consume/save

Question 18

What is austerity

Answer 18

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

Question 19

What is a direct tax

Answer 19

A tax on any form of income

Question 20

What is an indirect tax

Answer 20

A tax on spending

Question 21

What is a progressive tax

Answer 21

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

Question 22

What is a regressive tax

Answer 22

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

Question 23

What are 3 advantages of a regressive/indirect tax

Answer 23

• 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

Question 24

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

Answer 24

Sugar tax
Excise duties

Question 25

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

Answer 25

-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)

Question 26

What are two negatives of regressive/indirect taxes

Answer 26

- 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

Question 27

What are two arguments for progressive/direct taxes

Answer 27

- 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)

Question 28

What two categories can government spending be broken down into

Answer 28

Capital spending Current spending

Question 29

What is capital spending

Answer 29

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

Question 30

Give 3 examples of capital spending

Answer 30

Roads (Infrastructure) Hospitals (Healthcare) Schools (education)

Question 31

What is current spending

Answer 31

Day to day spending on expenses

Question 32

Give two examples of current spending

Answer 32

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

Question 33

What is a common cap target for a governments budget deficit

Answer 33

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%

Question 34

What is the 'golden rule' to do with government spending

Answer 34

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

Question 35

Why the 'golden rule' to do with government spending justified

Answer 35

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

Question 36

What is a cyclical budget deficit

Answer 36

Caused by fluctuations in the economic cycle. In a recession VAT is lower due to less AD in the economy, therefore tax revenue is lower, coupled with more spending on benefits

Question 37

Why is a cyclical budget deficit not seen as too problematic

Answer 37

The economic cycle shows that as an economy moves back into the recovery phase, AD will increase again meaning more VAT and tax revenue. Rising growth in the recovery period also means an increase in employment levels, which may reduce welfare spending

Question 38

What is a structural budget deficit

Answer 38

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

Question 39

Who are the OBR

Answer 39

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

Question 40

What are 4 objectives of fiscal policy

Answer 40

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

Question 41

What is expansionary fiscal policy

Answer 41

Decreasing tax and increasing government spending

Question 42

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

Answer 42

In the short run the budget deficit worsens due to increased gocernment spending and lower tax revenue, in the long run, it decreases due to more private sector investment

Question 43

What is contractionary fiscal policy

Answer 43

Increasing tax and less government spending

Question 44

What is Keynesian economics

Answer 44

Argues that demand drives supply and healthy economies spend/invest more than they save