Fiscal Policy 2 Flashcards
What does benefits in kind include
The estimated value to households of consuming services such as state education and the NHS
What are discretionary fiscal changes
Deliberate changes in direct and indirect taxation and government spending e.g. More spending on the NHS
What are automatic stabilisers
Changes in tax revenues and government spending that come about automatically as an economy moves through the business cycle
Examples of automatic and discretionary changes in fiscal policy
- tax revenues
- welfare spending
- budget balance and the circular flow
Fiscal policy impacts on the supply side of the economy
- labour market incentives
- capital spending
- entrepreneurship and investment
- r&d and innovation
- human capital of the workforce
What are free market economists sceptical about
The effects of government spending in improving the supply-side of the economy
What do free market economists argue
That lower taxation and tight control of government spending and borrowing is required to allow the private sector of the economy to flourish
Tax competition between countries
Happens when a national government uses reforms to the tax system as a supply-side strategy to attract investment and jobs into the economy
Examples of countries who have introduced a flat tax system
Russia, Estonia and Poland
What is the case for lower tax burdens (tax revenues as a share of GDP)
- stimulates work incentives and productivity
- helps create more jobs because businesses have less tax to pay
- encourages FDI
- encourages business start ups
Counter-arguments to the low-tax economy
- 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
Countries that are economically successful but have higher tax burdens and progressive tax and welfare systems
Denmark, Norway and Sweden
What does it mean when a government is running a budget deficit
It means that in a given year, total government expenditure exceeds total tax revenue
What does the government have to do if they are running a budget deficit
Has to borrow money through the issue of debt such as Treasury bills and bonds
What happens to government debt
Most of it is bought up by financial institutions but individuals can buy bonds, premium bonds and buy national savings certificates
What is the budget balance
The annual difference between tax revenues and government spending
What is cross government debt
Total debt owed by the government - also known as the national debt
Why is a persistently large budget deficit a problem
- financing it
- government debt mountain
- crowding-out
- risk of capital flight
Why is financing a debt a problem
The government might have to offer a higher interest rate to attract sufficient buyers of debt.
May fall into the debt trap
What is the debt trap
Where a government must borrow more to repay the interest on accumulated borrowing
What is the government debt mountain
Annual budget deficits over a number of years will cause the total amount of unpaid government debt to climb.
When does a fiscal crowding-out occur
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
Why do some economists believe that high borrowing risks cause a ‘run on a domestic currency’
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
What is government borrowing
Public sector borrowing is the amount borrowed wax heat to finance spending
What is national debt
Public sector debt is a measure of the accumulated national debt owed by the government
