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Economics (Macro) > Fiscal policy > Flashcards

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 3 examples of scenarios which worsened national debt

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

A

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

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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 government spending leads to a greater increase in national income

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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 (Infrastructure)
Hospitals (Healthcare)
Schools (education)

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 due to less AD in the economy, therefore tax revenue is lower, coupled with more spending on benefits

37
Q

Why is a cyclical budget deficit not seen as too problematic

A

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

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 economies spend/invest more than they save

45
Q
A

Economics (Macro) (11 decks)

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