Fiscal Policy Flashcards
Define fiscal policy
The use of government income and expenditure to change the level of economic spending (the governments main demand management tool)
Define the budget deficit
Government revenue < government expenditure
Define the budget surplus
Government surplus > government expenditure
What are the five main objectives of fiscal policy
- to contribute to LRAS
- deflationary objectives
- inflationary objectives
- to improve living standards
- microeconomic impacts
What are reflationary objectives?
To stimulate the output of an economy in decline
What are deflationary objectives?
To reduce price levels (inflation) by cutting AD
What are the microeconomic impacts of fiscal policy?
Intervention to correct market failure e.g sugar tax/road tax
What are the sources of government income
- tax revenue
- sale of government services e.g passports and prescription
- selling assets
- borrowing PSNCR (public sector net cash requirement)
- government reserves
Define government reserves
Uks official holdings of international reserves e.g gold and foreign currencies
What are the main objectives of the tax system?
- simple
- equitable
- convenient
- efficient
- fit for purpose
- flexible
Define the benefit principle
Taxes paid by the people who benefit from gov spending
Define progressive taxation
Those who are wealthier having to pay more taxes as they have more financial resources
Define a tax thresholds freeze
Tax rates go up go up at the beginning of a tax year but are then frozen for a number of years
April 21- personal allowance was raised to 12,570 and frozen for 5 years
What can a tax thresholds freeze sometimes cause?
Fiscal drag
Define a fiscal drag
When peoples taxable income increases without tax rates actually increasing
What does the laffer curve show?
How much tax revenue the government receives at each level of tax
Why does tax revenue begin to fall after point ‘T’ on the laffer curve?
People have less incentive to work because tax rates are too high
What does point ‘T’ on the laffer curve show?
The optimum tax rate where the government can maximise revenue
What are the axis on the laffer curve?
Y axis: tax revenue
X axis: tax rate (%)
Define direct taxes
Taxes paid directly on earnings
Define indirect taxes
Taxes that are levied on spending
What are the three categories of government spending?
- current expenditure
- capital expenditure
- transfer payments
Define current expenditure
Daily payments required to run the government and public sector e.g the wages and salaries of public employees (teachers, nhs workers, members of the parliament)
Define capital expenditure
Investments in infrastructure and capital equipment e.g new hospitals and schools