Fiscal policy

Question 1

Fiscal policy

Answer 1

-Changing government spending and taxation to influence AD
-Aims to stimulate economic growth and stabilise the economy

Question 2

Government budget

Answer 2

-total spending
-UK gov spends most of budget on pension, welfare benefits, health, education
-income tax is the biggest source of tax revenue

Question 3

Expansionary fiscal policy

Answer 3

-increased gov spending and lowering taxes
-worsens budget deficit

Tax cuts or increases: To encourage consumer spending or investment, the government may lower taxes or increase them to raise revenue.
Government spending: Increased spending on infrastructure, social programs, or defence can stimulate economic growth and create jobs.

Question 4

budget deficit vs debt

Answer 4

-deficit is the difference between gov expenditure and revenue in a financial year
-debt is the total amount owed by the government that has accumulated over the years

Question 5

Direct taxes vs indirect

Answer 5

-imposed on income and paid directly to gov from taxpayer
-e.g. income, coorporation, NICs, inheritance

-taxes on expenditure of goods and services
-increase production costs

Question 6

Limitations of fiscal policy

Answer 6

-Time lag of fiscal policy- takes time for funds to circulate through the economy and for people and businesses to adjust their behaviour
-The bigger the size of the multiplier, the bigger effect on AD and the more effective the policy (MPC, size of taxes)
-If the gov borrows from the private sector, there are fewer funds available for the private sector- this causes crowding out which can impact growth as investment spending is one of the key drivers of economic growth
-The UK government used expansionary fiscal policy shortly after the financial crisis.
VAT was cut from 17.5% to 15% in an attempt to increase consumer spending. The government received less tax revenue due to the recession, which led to an increase in government borrowing.
-Increasing taxes to reduce AD may cause disincentives to work, if this occurs, there will be a fall in productivity and AS could fall.
However higher taxes do not necessarily reduce incentives to work if the income effect dominates the substitution effect.
-inflationary pressures