Fiscal policy Flashcards
What is fiscal policy?
Fiscal policy refers to government actions that involve changing levels of government spending, taxation, and the budget balance to influence the economy.
What are the macroeconomic and microeconomic functions of fiscal policy?
Macroeconomic function: Fiscal policy is used to manage overall economic performance, such as controlling inflation, reducing unemployment, and encouraging economic growth.
Microeconomic function: Fiscal policy can target specific sectors or groups to address inequality or influence resource allocation, like subsidies for renewable energy or taxes on cigarettes.
How can fiscal policy be used to influence aggregate demand?
Fiscal policy can increase AD through higher government spending or lower taxes, which raises consumer and business spending. Conversely, cutting government spending or raising taxes can reduce AD, helping to control inflation.
How can fiscal policy influence aggregate supply?
Government spending on infrastructure, education, and healthcare can improve productivity, increasing LRAS. Tax incentives for investment can also enhance business productivity and capacity, shifting LRAS to the right.
How do government spending and taxation affect the pattern of economic activity?
Spending and taxation can target specific areas, like health or defence, shaping the economy’s structure. For instance, subsidies for green energy promote environmental sectors, while high taxes on harmful products discourage their consumption.
What are the types of and reasons for public expenditure?
Current expenditure (e.g., wages for public workers)
capital expenditure (e.g., infrastructure)
transfer payments (e.g., benefits).
Reasons: To provide public goods, reduce inequality, stabilize the economy, and support economic growth.
Why do governments levy taxes?
Taxes fund public services, manage economic stability, redistribute wealth, and discourage harmful behaviours (e.g., taxes on cigarettes or alcohol).
What is the difference between direct and indirect taxes?
Direct taxes are paid directly to the government by individuals or organizations, such as income tax and corporation tax.
Indirect taxes are applied to goods and services and collected by intermediaries, like VAT and excise duties.
What are progressive, proportional, and regressive taxes?
Progressive taxes: Tax rate increases as income rises (e.g., income tax).
Proportional taxes: A flat tax rate, regardless of income level.
Regressive taxes: Tax rate decreases as income rises (e.g., sales taxes which take a larger share of income from lower earners).
What are some key principles of taxation?
-Taxes should be equitable (fair)
-Efficient (not overly complex or costly)
-Convenient (easy to pay)
-Certain (clear and predictable).
What are the roles and relative merits of different UK taxes?
-Income tax provides a large, progressive revenue source.
-VAT is efficient to collect but regressive.
-Corporation tax encourages investment but risks tax avoidance.
-Excise duties can discourage harmful consumption but are regressive
What is the relationship between the budget balance and the national debt?
The budget balance is the difference between government revenue and spending within a given period. National debt accumulates when governments run consistent budget deficits over time, representing the total debt owed by the government
What are cyclical and structural budget deficits and surpluses?
Cyclical deficits/surpluses occur due to economic cycles, with deficits during recessions and surpluses during booms
Structural deficits/surpluses exist regardless of economic cycles, reflecting imbalances in government spending and revenue policies
What are the macroeconomic consequences of budget deficits and surpluses?
Deficits can increase national debt, potentially leading to higher future taxes or lower government spending. They may also crowd out private investment by raising interest rates
Surpluses can reduce debt and interest costs but may limit economic growth by reducing government spending or increasing taxes
Why is the size of the national debt significant?
A large national debt may increase interest obligations, crowd out private investment, reduce fiscal flexibility, and require future tax increases or spending cuts. However, manageable debt levels can support economic growth if spent on productive investments.
