Fiscal Policy Flashcards
Define Fiscal Policy.
Involves the use of government spending, taxation & government borrowing to influence the pattern of economic activity and also the level and growth of AD, output and employment.
What is a budget deficit.
It occurs when government spending exceeds government revenue (G>T).
It is an injection into the circular flow of income and is called expansionary fiscal policy.
What is a balanced budget
when government spending equals government revenue (G=T).
What is a budget surplus.
Occurs when government spending is less than government revenue (G
What is a cyclical budget deficit.
The part of the budget deficit that arises during a slowdown/recession and falls during a recovery/boom.
What is a structural budget deficit.
The part of the budget deficit that is not affected by the economic cycle but results from structural change in the economy.
Define National Debt.
The stock of all government debt that hasn’t been paid back to the debtors.
What is public sector borrowing.
Borrowing by the government to finance a budget deficit.
Demand-side fiscal policy
Changes in fiscal policy to increase or decrease AD.
Expansionary Fiscal Policy
Fiscal Policy used to increase aggregate demand, e.g. more government spending than revenue.
Contractionary Fiscal Policy
Fiscal Policy used to reduce aggregate demand, e.g. more taxation than spending.
Supply-side fiscal policy
Changes in fiscal policy to increase productive capacity.
Progressive taxation
A tax which rises in line with income.
Regressive taxation
When the proportion of income paid on tax falls as income rises.
Proportional taxation
When the proportion of taxation stays the same as income rises.
Direct Tax
A tax which cannot be shifted onto someone else. These are normally levied on income and wealth.
Indirect Tax
A tax which can be shifted onto someone else. E.g. by raising the price of a product being sold. These are levied on spending.
What are 2 policies that could be involved in expansionary fiscal policy?
Cutting taxes and increasing government spending.
Which type of fiscal policy involves increasing taxes and/or reducing government spending?
Contractionary Fiscal Policy.
Fiscal Austerity
Refers to decisions made by a government to reduce the amount of government borrowing by either cutting government spending and/or increasing taxation.
What are the 3 types of government spending?
Transfer payments, e.g. benefits.
Current government spending, e.g. state-provided g/s.
Capital spending, e.g. spending on infrastructure.
What are the 5 reasons governments spend?
Public goods and merit goods. Safety-net system of welfare benefits. Necessary infrastructure. Managing the level and growth of AD. Promoting equity.
Automatic Stabillisers
Changes in tax revenues and government spending that change automatically as the economy moves through the cycle.
Discretionary Fiscal changes
Deliberate changes in direct and indirect taxation and government spending, e.g. a decision by the government to increase income tax.
What is the biggest source of income for the UK government?
Income Tax
Corporation Tax
A tax on business profits. (19% in the UK)
Value Added Tax (VAT)
A tax that is charged on most goods and services that VAT-registered businesses provide in the UK.
Hypothecated Tax
A tax levied to raise money for a specific purpose. E.g. National Insurance Contributions (NICs)
What is a levy & why do governments levy taxes?
When you levy something, you impose something or put something in place.
Governments levy taxes to raise revenue to finance government expenditure. They also do it to change patterns of economic activity. As well as this, it helps to redistribute income and discourages consumption & production.
