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
Define transfer payments
Payments made by the government for which no goods/services are exchanges e.g unemployment/disability payments
Define counter-cyclical measures
Policy measures which counteract the effects of the economic cycle
Define discretionary fiscal changes
Deliberate changes in taxation and government spending
Define automatic stabilisers
Changes in tax revenues and state spending that rise automatically as the economy moves through the cycle
What are the influences on automatic stabilisers?
- size of government sector
- progressivity of tax
- level of welfare
What are the benefits of a budget deficit?
- government borrowing can benefit growth
- government borrowing can be used to manage demand
What are some drawbacks of a budget deficit?
- interest rates will go up
- markets will become incentivised
Define the cyclical budget deficit
Budget deficit that takes into account fluctuations in tax revenue and spending due to changes in the economic cycle e.g in a recession, tax revenues fall
Define austerity
A set of economic policies used by the government to reduce the budget deficit
What is the goal of austerity
To stabilise the debt-to-gdp ratio
What are the three main types of lag that slow down the implementation of fiscal policy?
Recognition lag
Imperfect information
Response lag
What is the crowding out hypothesis?
When an increase in government spending leads to a fall in private sector spending and investment (overall AD does not increase)
Define the tax base
The number of tax paying agents in the economy
Define flat rate tax
When everyone is taxed at just one rate (this boosts incentives for people to work)
What does expansionary fiscal policy aim to do
- increase AD
- (which leads to) stimulation of economic growth
- (which leads to) the stabilisation of the economy
What two things are often done within ‘expansionary fiscal policies’?
- increase spending
- reducing taxes
What does expansionary fiscal policy often lead to?
Worsens the budget deficit (as governments need to borrow more to finance this)
Outline what taxes are used for
- to raise government revenue (600 billion/ annum)
- correct market failure
- generate more equity within society
Define tariffs
Taxes on imports
Define a progressive tax system
As income rises, a larger percentage of income is payed in tax
Outline the diagram if a progressive tax system
Y axis: tax rate (%)
X axis: income level
Upward sloping curve
Define a regressive tax system
As income rises, a smaller percentage of income is payed in tax
Outline the diagram of a regressive tax system
Y axis: tax rate (%)
X axis: income level
Downward sloping curve
Define a proportional tax system
As income rises, the same percentage of income is payed in tax
Outline the diagram for a proportional tax system
Y axis: tax rate (%)
X axis: income level
Horizontal curve (only y1 and y2 marked)
How is a budget deficit financed?
Through public sector borrowing
What are the consequences of public sector borrowing?
The national debt increases
What do Keynesian economists believe about running a budget deficit?
Governments should run a budget deficit to finance spending and stimulate economic growth
Graphically display the crowding out hypothesis
Y axis: gov spending
X axis: private sector spending
Curve: (looks the the PPF)
