Fiscal Policy 2

Question 1

What does benefits in kind include

Answer 1

The estimated value to households of consuming services such as state education and the NHS

Question 2

What are discretionary fiscal changes

Answer 2

Deliberate changes in direct and indirect taxation and government spending e.g. More spending on the NHS

Question 3

What are automatic stabilisers

Answer 3

Changes in tax revenues and government spending that come about automatically as an economy moves through the business cycle

Question 4

Examples of automatic and discretionary changes in fiscal policy

Answer 4

• tax revenues
• welfare spending
• budget balance and the circular flow

Question 5

Fiscal policy impacts on the supply side of the economy

Answer 5

• labour market incentives
• capital spending
• entrepreneurship and investment
• r&d and innovation
• human capital of the workforce

Question 6

What are free market economists sceptical about

Answer 6

The effects of government spending in improving the supply-side of the economy

Question 7

What do free market economists argue

Answer 7

That lower taxation and tight control of government spending and borrowing is required to allow the private sector of the economy to flourish

Question 8

Tax competition between countries

Answer 8

Happens when a national government uses reforms to the tax system as a supply-side strategy to attract investment and jobs into the economy

Question 9

Examples of countries who have introduced a flat tax system

Answer 9

Russia, Estonia and Poland

Question 10

What is the case for lower tax burdens (tax revenues as a share of GDP)

Answer 10

• stimulates work incentives and productivity
• helps create more jobs because businesses have less tax to pay
• encourages FDI
• encourages business start ups

Question 11

Counter-arguments to the low-tax economy

Answer 11

• taxation helps equity
• tax cuts don’t always lead to an increase in tax revenues for the gov
• taxes needed to fund stuff like education

Question 12

Countries that are economically successful but have higher tax burdens and progressive tax and welfare systems

Answer 12

Denmark, Norway and Sweden

Question 13

What does it mean when a government is running a budget deficit

Answer 13

It means that in a given year, total government expenditure exceeds total tax revenue

Question 14

What does the government have to do if they are running a budget deficit

Answer 14

Has to borrow money through the issue of debt such as Treasury bills and bonds

Question 15

What happens to government debt

Answer 15

Most of it is bought up by financial institutions but individuals can buy bonds, premium bonds and buy national savings certificates

Question 16

What is the budget balance

Answer 16

The annual difference between tax revenues and government spending

Question 17

What is cross government debt

Answer 17

Total debt owed by the government - also known as the national debt

Question 18

Why is a persistently large budget deficit a problem

Answer 18

• financing it
• government debt mountain
• crowding-out
• risk of capital flight

Question 19

Why is financing a debt a problem

Answer 19

The government might have to offer a higher interest rate to attract sufficient buyers of debt.
May fall into the debt trap

Question 20

What is the debt trap

Answer 20

Where a government must borrow more to repay the interest on accumulated borrowing

Question 21

What is the government debt mountain

Answer 21

Annual budget deficits over a number of years will cause the total amount of unpaid government debt to climb.

Question 22

When does a fiscal crowding-out occur

Answer 22

If a larger budget deficit leads to higher interest rates and taxation in the medium term and thereby has a negative effect on growth in consumption and investment spending

Question 23

Why do some economists believe that high borrowing risks cause a ‘run on a domestic currency’

Answer 23

Because the government may find it difficult to find sufficient buyers of its debt and the credit-rating agencies may decide to reduce the rating on a nation’s sovereign debt

Question 24

What is government borrowing

Answer 24

Public sector borrowing is the amount borrowed wax heat to finance spending

Question 25

What is national debt

Answer 25

Public sector debt is a measure of the accumulated national debt owed by the government