Fiscal Policy Flashcards
What is fiscal policy?
Policy by the government to influence the economy
What can fiscal policy affect?
Aggregate demand and aggregate supply
What are the aims of fiscal policy?
To prevent national income remaining persistently bellow the full employment level, to smooth out cyclical fluctuations in AD and to solve market failures
What is government spending?
An injection
What does an increase in government spending cause?
It shifts the injections upwards and increase equilibrium output
What types of governments are there?
Local and central government
What is local government responsible for?
Regional services
What is central government responsible for?
National provision of some products
What are examples of government spending?
Defence, social security, education, NHS and repayments on previous borrowing
What is government expenditure?
It is an injection that affects the position of the AD curve
What is government spending financed by?
Tax revenue and borrowing
What are direct taxes?
Placed on households’ incomes and firms’ profits
What are examples of direct taxes?
Business rates, income, corporation, national insure, capital gains, inheritance and council tax
What are indirect taxes?
Paid when items are bought
What are example of indirect taxes?
Excise duties, licences, customs duties and landfill tax
What are the different types of taxation systems?
Progressive, regressive and proportional
What is progressive tax?
Average rate of tax increases as people earn more money
What is regressive tax?
Average rate of tax falls as people earn more money
What is proportional tax?
Average rate of tax is constant whatever people earn
How do we calculate the average rate of tax?
Average rate of tax = (tax paid / income) x 100%
What is marginal rate of tax?
Tax paid on the last pound earned
How do we calculate the marginal rate of tax?
Change in tax paid / change in income
What makes an effective taxation system?
Understandable, cost-effective, difficult to avoid paying, non-distortionary and does not have a disincentive effect
What is tax avoidance?
When individuals or firms take legal steps to avoid paying tax
What is tax evasion?
Illegally avoiding tax
What is a budget deficit?
When governments expenditure is greater than governments receipts
What is a budget surplus?
When governments receipts are greater than governments expenditure
What is national debt?
The outstanding government debt
What is the public sector?
Central government + local government + public corporations
What is the public sector net borrowing (PSNB)?
The amount the public sector needs to borrow to finance the combined deficit
What is public-sector debt?
Accumulated total of past PSNB’s
What are the instruments of fiscal policy?
Automatic stabilisers and discretionary fiscal policy
What are automatic stabilisers?
Mechanisms in the economy that reduce the response of national income to shocks
What are the advantages of automatic stabilisers?
Reduce fluctuations in national income and are quick, not dependent on forecasting accuracy
What are the disadvantages of automatic stabilisers?
Fiscal drag and not preventative
What is discretionary fiscal policy?
Active policy by the government to stabilise output
What changes occur with discretionary fiscal policy?
It changes the level of government expenditure and change the marginal tax propensity
How does discretionary fiscal policy change the marginal tax propensity?
Changing rates of existing taxes, changing benefits, introducing new taxes/benefits and withdrawing taxes/benefits
What is the effectiveness of discretionary fiscal policy?
Time lags, uncertainty, induced effects on autonomous demand and crowding out
What is supply-side fiscal policy?
It influences AS in the economy through regulation in the labour market and goods market
