fiscal policy context very important Flashcards
what are the two types of expansionary fiscal policy that has been used for covid?
- massive increases in government spending
- massive tax reductions
what is the impact of high government spending?-nhs
Blank cheque to NHS-through the help of government spending we have seen an increase in building emergency hospitals,recruiting extra doctors and nurses so gov spending has been very high on nhs.
what is the impact of high government spending on wage subsidies?
The forlough scheme was literally paying the wages of employed and self-employed, this actually lead to massive amounts of gov debt and spending
what is the impact of government spending on business rate exemption?
This is the tax based value on property this burdens businesses heavily which means it was a huge relief to not pay for these costs when they weren’t working
gov spending on welfare?
during the pandemic many people lost their jobs so the government made it easier to access universal credit +benefits so they could support themselves.
the impact of gov spending on tax cuts?
this helped many businesses which weren’t stressed about these extra costs
why was government spending used so much?
This is because it has been used in order to stimulate AD and help the economy recover from a recession.
- This led to economic growth
- A reduction in cyclical unemployment
- increase inflation and reduce deflation
was government spending efficient?
yes because we thought we would experience deflation but it didn’t happen and also unemployment levels did not rise much because of subsidy in wages.
Despite the expansionary policy being effective what were the side effects?
- There was a high budget deficit worth 14.5%
- the national debt rose by 100% of GDP
- there will be a huge burden for the future generation they will have to pay these costs
- there will be high demand full inflation so negative output gaps
after the covid- the government has introduced a contractionary fiscal policy why is this?
this is because now the economy is starting to recover and the government has a huge budget deficit for them to recover they will have to raise prices for businesses and consumers.
what is the impact of direct taxes-national insurance?
One of them is national insurance which is used to pay by employers and employees and it has risen to 1.25
what is the impact of corporation tax?
it has risen to 19% that businesses will have to pay off from their retained profits
what is the impact of income taxes?
income tax will rise but the government has stated that as inflation will rise the income of workers will rise however they are going to be worse because they will have to pay higher taxes
state reasons for contractionary fiscal policy?
they are putting these objectives to bring down the budget deficit
- this could lead to confidence in government finances since they will be seen as less risky borrowers which means for bonds the interest rate they can offer from those bonds can be lower and cheaper to borrow in the future and fund public finances
- if there was to be another crisis they need to be prepared to impose expansionary fiscal policy then so essentially they can’t be in a debt
what are the problems with a contractionary fiscal policy?
- demand-side shock-if these policies are not handled properly it can actually lead to another recession
- doing during cost of living crisis-where prices are already high e.g national insurance is a prime example of regressive taxes which means it will lead to income inequality
