Fiscal Policy Flashcards
Fiscal policy definition
Use of gov finances (spending, taxation, borrowing) to manipulate AD (and LRAS) to achieve macroeconomic objectives
Bond yield
The rate of interest paid on government debt
Budget deficit
The budget deficit is the difference between what the government receives in revenue and what it spends
Direct taxation
Taxes on income, profits and wealth, paid directly by the bearer to the tax authorities.
Cyclical fiscal deficit
The size of the deficit is influenced by state of the economy: in a boom, tax receipts are relatively high and spending on unemployment benefit is low
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.
National debt
Debt is the total amount owed by the government that has accumulated over the years.
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.
6 key roles for fiscal policy
- Financing gov spending 2. Changing wealth and final income 3. Providing a welfare state safety-net 4. Managing economic cycle 5. Improving LR competitiveness 6. Tackle market failure
Cut in personal income tax rates –> (exp)
Boost to disposible income –> adds to consumer demand
Cut in indirect taxes –> (exp)
Lower prices- leads to higher real GDP –> adds to consumer demand
Cut in corporation tax –> (exp)
Higher profits post tax –> adds to capital spending
Cut in tax from interest from saving –> (exp)
Boost to disponible income of people with net savings –> adds to consumer demand
What would contractionary fiscal policy involve (at least 1 of)
- A cut in government expenditure either in real terms or as a share of GDP
- An increase in direct and/or indirect taxes
- An attempt to reduce the size of the budget deficit
Spending by the public sector can be broken into 3 parts
- Transfer payments (welfare payments)
- Current government spending (on state provided G&S)
- Capital spending (includes infrastructure)
Total UK government spending in 2015
£745 billion (43.1% of GDP–> 7% on capital & 22% on public services)
What are the justifications for G?
- Socially efficient level of public & merit goods & overcome market failure
- Safety net system of welfare benefits- part of redistribution of wealth
- Provide necessary infrastructure
- Manage level of growth of AD
- Promoting equity
- Economic efficiency e.g. infrastructure projects
What is direct taxation levied on?
Income, wealth and profit
What happens to tax revenue when the economy expands?
Tax revenue increases which takes money out of the circular flow model
What happens to welfare sending when the economy expands?
Less welfare spending on e.g. income support & unemployed benefits
What happens to the budget balance and the circular flow in a growing economy?
Net outflow of money when the economy is fast growing and in a recession budget deficit is larger
6 key roles of fiscal policy with AS
- Work incentives/active labour supply
- Inward migration of key workers
- Capital investment e.g. FDI projects
- Enterprise/entrepreneurship
- Taxation and incentives to study
- Tariffs fact import costs
Labour market incentives
a) changes in income tax encourage people to actively seek work
b) lower taxes may have a positive effect on work effort and labour productivity
c) cuts to national insurance contributions may help expand the active labour supply
Capital spending
a) spending on infrastructure helps provide capacity needed for other businesses to flourish
b) lower corporation tax attracts foreign investment
