Government Expenditure [2.2.4] Flashcards
What are the top 5 areas of government spending?
Social protection
Healthcare
Debt interest
Education
Defence
What are the top 5 areas of government taxation?
Income tax - consumers
National insurance - consumers
Corporation tax - Business
VAT - consumers
C + I main areas of government taxation
What are the key roles of fiscal policy?
Financing key areas of government spending - Taxation to encourage government spending gov spending also to stimulate AD.
Altering the distribution of income and wealth - Improve inequality and reduce poverty by using a progressive tax system.
Providing a welfare state safety- net for families - Improves AD provides education healthcare welfare benefits to encourage consumption.
Managing macroeconomic cycle - Gov need to intervene during a recession, threshold changes results in an increase in expenditure or increase in taxes.
Improving a country’s competitiveness - Helping buisnesses increase their output and therefore improve quality and quantity of exports
Tackles market failure through intervention the government intervene and spend during business failure
What does fiscal policy do?
Fiscal policy is also used to change the pattern of spending on goods and services.
It impacts on the level and growth of AD, output and jobs
Using fiscal policy to manipulate AD is called demand management
Each year the chancellor sets a budget that outlines the gov spending and taxation policies
What are the 2 types of demand management?
An expansionary fiscal policy
A deflationary fiscal policy
What is expansionary fiscal policy?
Expansionary fiscal policy happens when the government increase government spending and reduces taxation to boost the economy.
This will lead to budget deficit (when the government spends more money in a year than in collects taxes)
What is deflationary fiscal policy?
Deflationary fiscal policy happens if taxes are increase and spending is reduced.
This may lead to a budget surplus when taxes are greater than spending.
How does expansionary fiscal policy look like on a AD diagram?
How does deflationary fiscal policy look like on an AD diagram?
What happens if the government increase spending when there is full employment
If the government want to increase spending during full employment it has to take away some people and capital. To lets say build a road, they will have to take the labour and capital from other sectors of the economy. GDP would not increase as there already is full employment
What is crowding out?
Would not stimulate the economy crowding out private spending and investing.
What is the fiscal multipllier?
Initial increase in government spending causes increase in spending throughout the economy known as fiscal multiplier
During a recession the FOP are underused, labour and capital are unemployed or underemployed. Government spending on a infrastructure will increase GDP,
Government hires construction workers that are unemployed who buy from a shop workers at the shop have money and hire more workers. they go out and spend multiplier effect.
What demand management or stabilisers occur during a boom?
Tax collected will increase because
How does the trade cycle influence government spending?
Decisions over government expenditure may be made in order to manage AD, and therefore regulate the trade cycle. In a recession, the gov may increase spending in order to increase demand to reduce unemployment. Government spending also automatically rises during a recession as they have to spend more on unemployment benefits
How does fiscal policy influence government expenditure?
Some government spending is fixed from year to year, for examples schools and hospitals need to be funded, Governments can vary what they spend each year, this is set through their budget. Fiscal policy is the decisions about government spending and taxes and it will depend on the priorities of that government. The level of government expenditure depends on what they lay out in fiscal policy.
