Fiscal policy Flashcards
define fiscal policy
the use of govt spending and taxation to influence the pattern of economic activity, affect the level of growth in AD, output and employment
5 reasons why govt use taxation
- influence AD
- reduce negative externalities
- raise govt revenue
- protect jobs in the UK
- redistribute income
define budget deficit
difference between what the govt receives in revenue and what it spends
define cyclical fiscal deficit
size of the deficit is influenced by the state of the economy
define direct tax
taxes on income, profits and wealth, paid directly by authorities, cannot be passed on
define indirect tax
taxes on expenditure and are paid to the tax authorities not by the consumer but indirectly by the suppliers of the goods may be able to pass on
define national debt
total amount owed by the govt which has accumulated over years
define structural fiscal deficit
part of the deficit which isn’t related to the state of the economy and will not disappear when the economy recovers
define current spending
on providing public services
define capital spending
new public infrastructure
define progressive tax
marginal rate of tax rises as income rises as people earn more income the rate of tax on each extra pound goes up
define regressive tax
rate of tax falls as income rises the average rate of tax is lower for people of richer incomes.
define proportion tax
the marginal rate of tax is constant leading to a constant average rate of tax
define quantitative control
loosen the rules surrounding the amount of money someone can control
list Uk govts fiscal austerity policies
- rise in standard rate of VAT 20%
- rise in employee national insurance contributions
(11%) - cuts in real govt spending
- welfare corps
arguments for law tax economy
- stimulate work incentives and productivity
- creates more jobs as businesses pay less tax
- inflow of FDI from businesses
- incentives enterprises and start ups
- increases total tax revenue
economic justifications for budget deficits
- rise in borrowing to fund extra govt spending, effects on AD, output & employment when operating below capacity
- automatic rise in budget deficit to cushion fall in AD due to external economic shock
- if fiscal stimulus works, deficit will improve due to tax revenues
- makes sense for govt to borrow money if interest rates are low
how does a tax cut in consumer spending stimulate economic recovery
cuts in VAT or income tax, low confidence tax cuts likely to be saved
how does a business investment in consumer spending stimulate economic recovery
lower corporation tax, businesses might choose to invest overseas
how does a lower employment tax in consumer spending stimulate economic recovery
reduced national insurance creating more jobs, skills shortage may limit new jobs
how does a lower fuel/carbon taxes in consumer spending stimulate economic recovery
lower costs for businesses, less inflation, possible conflicts with environmental policies
reasons for high level of public debt
- rising debt interest payments
- opportunity cost- less interest on debt could free up extra spending on healthcare
-higher taxes - falls future generations of tax payers
effects of changes in tax on AS
- work incentives/active labour supply
- inward migration of key workers
- capital investment
- tariffs affect import costs
- taxation + incentives to study
- enterprise / entrepreneurship
