Fiscal Policy Flashcards
What does fiscal policy involve
Using government spending, taxation and borrowing to affect the level and growth of AD, output and jobs
What is fiscal policy also a way of doing
Changing the pattern of spending on goods and services.
Also redistributing income and wealth.
Correcting free-market failures.
What to changes in fiscal policy affect
AD and AS
What is a bond yield
The rate of interest paid on government debt
What is a budget (fiscal) deficit
The budget deficit is the difference between what the government receives in revenue and what it spends
What is a cyclical fiscal deficit
The size of the deficit is influenced by the state of the economy - in a boom tax receipts are relatively high and spending on unemployment benefit is low
What is direct taxation
Taxes on income, profits and wealth, paid directly by the bearer to the tax authorities
What is fiscal policy
Taxation and spending measures that allow the government to guide the economy
What is indirect taxation
Taxes on expenditure e.g. VAT. They are paid to the tax authorities, not by the consumer, but indirectly by the suppliers of the goods or services.
What is national debt
Debt is the total amount owed by the government that has accumulated over the years.
What is a structural fiscal deficit
The structural deficit is that part of the deficit which is not related to the state of the economy. This part of the deficit will not disappear when the economy recovers.
What are public sector businesses
Owner and operated by the governments
What is the public sector
Not profit driven (yet the private sector usually is)
Examples of public sector businesses / corporations
Channel 4
Royal Mail
Key roles for fiscal policy
- financing government spending
- changing final income and wealth
- providing a welfare state safety-net
- managing the economic cycle
- improving long run competitiveness
- tackle important market failures
Fiscal policy and AD
Fiscal policy has been seen as an instrument of demand management.
Keynesian view of fiscal policy
Fiscal policy can have powerful effects on AD, output and unemployment when the economy is operating below full capacity and national output, and where there is a need to provide a demand-stimulus
Monetarist view on fiscal policy
They believe that GS and tax hanged only have a temporary effect on AD, output and jobs and that the tools of monetary policy are a more effective instrument in controlling inflation and maintains macroeconomic stability.
What do the multiplier effects of an expansionary fiscal policy depend on
How much spare productive capacity the economy has; how much of any increase in disposable income is spent rather than saved or spent on imports.
What would a contractionary fiscal policy (commonly known as fiscal austerity) involve
- cut in government expenditure
- increase in direct and/or indirect taxes
- attempt to reduce the size of the budget deficit
What can spending on the public sector involve
- transfer payments
- current government spending
- capital spending
What are transfer payments
Welfare payments made available through the social security system including child benefits and state pension
What is current government spending
Spending on state-provides goods and services
What is capital spending
It includes infrastructure spending such as new motorways and roads. Public sector investment spending adds to the economy’s capital stock and can have important demand and supply side effects in the LR.
What are the justifications for government spending
- to provide a socially efficient level of public goods and merit goods (overcome market failure)
- provide welfare benefits
- provide necessary infrastructure
- manage AD
- promoting equity
- improved economic efficiency and competitiveness
What is direct taxation
Levied on income, wealth and profit
What are indirect taxes
Taxes on spending e.g. excise duties
What is a progressive tax
The marginal rate of tax rises as income rises
What is a proportional tax
Where the marginal rate of tax is constant
What is a regressive tax
The rate of tax falls as income rises
Income tax in the U.K.
Progressive
Basic rate = 20%
Higher rate = 40%
What is corporation tax
Tax on business profits.
There is a tax free allowance for businesses making low annual profits.
What is value added tax
A tax that is charged on most goods and services that VAT registered businesses provide in the U.K.
How does the UK redistribute income
Tax and welfare systems
Why is the UK tax and welfare system mildly progressive
Because it leads to a smaller gap between households when final income is measured