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economics exam > government finance > Flashcards

government finance Flashcards

1
Q

why does the government spend money on the public sector (5)

A
  • public goods wouldn’t be provided by the private sector e.g. missing market as there is issues with non-excludability and free riders e.g. street lighting
  • merit goods would be under provided by private sector and the government believe the public ought to have these goods e.g. education
  • demerit goods would be over provided
  • some sections in society need assistance with the basic needs
  • the government makes income distribution more fair
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2
Q

what are the 4 canons of taxation

A

equity: tax should be charged according to the ability to pay
efficiency: taxes should be relatively inexpensive to collect
certainty: taxpayer should know how much tax he or she has to pay
convenience: taxes should be paid when suitable to the taxpayer

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3
Q

what are direct taxes

A

taxes on income and wealth that are collected by his majesty’s revenue and customs

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4
Q

examples of direct taxes(6)

A

income tax: tax on wage and salary
Council tax: tax paid to local authority the amount you pay depends on the value of your property
business rates: paid to local authority and the amount paid depends on the location
capital gains tax: a tax on profit realised on the sale of non-inventory asset e.g. sale of stocks
inheritance tax: tax paid on the value of inherited estate
corporation tax: a tax on a firm’s profits

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5
Q

what is indirect tax

A

taxes on spending usually paid indirectly to the seller and end up being collected by HMRC

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6
Q

examples of indirect tax (4)

A

value added tax: tax on goods and services at 20%
customs duties: tax levied on imports
excise duties: tax imposed on goods produced within the country
petroleum revenue tax: tax on the revenue of oil companies in the UK

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7
Q

what is a progressive tax (3)

A

a tax that takes a larger percentage of income as income rises

it takes into account a persons ability to pay

most direct taxes are progressive

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8
Q

what is a regressive tax (4)

A

a tax that as income rises the proportion in tax falls

it does not take into account a persons ability to pay

low income earners pay a higher percentage of their income in tax e.g. VAT

most indirect taxes are regressive

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9
Q

fiscal policy that reduces income inequality (6)

A

taxation:
increase income tax - progressive so high earners pay more and revenue is redistributed by the government

reduce VAT - regressive tax means loe earners pay less of their income

increase rates of inheritance or capital gains - paid by the richest in society which can be redistributed

Spending:
increase spending on infrastructure to create jobs

increase benefit payments to increase income of those who are unemployed

increase salary of public sector workers

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10
Q

Reasons why the government has altered the balance from direct to indirect taxation (3)

A
  • cutting rates of income tax may increase tax revenue as high income tax encourages high earners to avoid paying tax all together and try to exploit tax through loopholes. lower rates may discourage this
  • incentive to earn are encouraged as people will be able to keep more of what they earn encouraging them to work harder and those whoa re unemployed may seek a job. this increases tax revenue and encourage economic growth
  • people have more choice as individuals can choose whether or not to purchase goods with tax e.g. cigs and alcohol leading to a healthier population and cleaner environment
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11
Q

negative effects of the shift from direct to indirect taxation (3)

A

tax revenue may not increase as people may work less as they do not need to work as long and they may take more leisure time meaning there is no increase in tax revenue

higher demand in the economy may lead to inflation: as worker have higher disposable income spending will increase leading to demand pull inflation

the distribution of income and wealth will be more uneven because income tax is progressive so cuts will benefit high income earners. indirect taxes are regressive meaning there will be a greater burden on lower income earners

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12
Q

effects of changes in direct and indirect tax on individuals (2)

A
  • more disposable income leading to a better standard of living as they can afford more
  • raising of indirect taxes will hit lower income groups as they tend to spend more of their income on demerit goods e.g. alcohol so increases these taxes may encourage them to stop purchasing these goods. people willi smoke and drink less which has positive effects on the NHS
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13
Q

effects of changes in direct and indirect tax on firms (5)

A
  • with more income people will be able to demand more goods increasing sales and profits
  • if demand rises faster than firms can produce they can charge higher prices so make even more profit
  • firms might meet more competition as other firms might come into the market to take advantage of the higher spending
  • if indirect tax increases there might be a fall in demand leading to lower profits leading to a firm failure
  • aim has been to allow firms to earn more profits to encourage investment. the UK has low business taxation compared to other EU countries which helps attract FDI
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14
Q

effects of changes in direct and indirect tax on governments (3)

A
  • if income falls there is more incentive for people to work rather than claim JSA. leads to less unemployment so increased income tax and saving in JSA payments
  • if income tax falls people have increase disposable income to spend on buying goods leading to increase VAT income
  • if government has increased income they could reduce income tax further or spend on public and merit goods
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15
Q

types of government spending (3)

A
  • capital spending: spending on buildings. long term items e.g. new hospitals. items can be used more than once and add onto the nations wealth
  • current spending: running costs of government. day to day spending on short term items e.g. pills in hospitals or salary payments
  • transfer payments: payments to individuals/firms that provide no economic benefit in return e.g. JSA, pensions. they aim to redistribute income and spending power
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16
Q

what is a government budget (2)

A

the plan the government makes to decide how much to spend and how much it want to raise in revenue to finance expenditure

it is a statement made to the house of commons on the nations finance and governments proposals for changes to taxation

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17
Q

What is a balanced budget (2)

A

planned expenditure = planed income

slows down demand in the economy to lower inflation or reduced a current account deficit

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18
Q

what is a surplus budget (4)

A

planned expenditure < planned income

gov plans to raise more then it spends

boosts the circular flow of income and generates economic growth and reduces unemployment

the gov can try pay of debts

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19
Q

what is a deficit budget (3)

A

planned expenditure > planned income

gov plans to spend more than it raises in tax

it is financed by borrowing which adds to the national debt

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20
Q

what is the public sector net requirement (3)

A

this si the amount of money the government has to borrow when taxes and other sources of income are not enough to pay for all the services that need to be provided.

it is financed by selling bonds, bills and securities to financial institutions

it is measured in billions and as a percentage of GDP

21
Q

what is the national debt

A

the total amount of accumulated debt of the government

22
Q

what is austerity

A

measures taken by the government to reduce a budget deficit/create a budget surplus

23
Q

impact of borrowing on the national debt (3)

A

Borrowing means the national debt keeps increasing every year if we have a deficit

it leads to an opportunity cost of the government spending

living standards of future generations may suffer if the government chooses to make paying off the debt a priority

24
Q

what are the reasons for the national debts (6)

A
  • enables the government to spend more during periods of crisis e.g. pandemic and recessions
  • in recession the gov will automatically receive less tax revenue and will spend more on benefits leading to a rise in debt
  • government spending during recession can help provide fiscal stimulus to promote economic recovery as they are injecting demand into the economy e.g. multiplier
  • there is a strong market demand for government debts as investors see them as risk free meaning government can borrow easily
  • finance investment in projects leading to high growth in future
  • pressure on politicians to cut taxes and increase government spending
25
Q

ways to reduce budget deficit (5)

A

reducing government spending by cutting benefit payments

increasing rate of direct or indirect taxation to increase tax revenue

widen range of goods and services taxed

selling government owned assets

increase or begin charging for government services e.g. hospital car parks

26
Q

effects of having a high budget deficit (5)

A
  • gov has to borrow money
  • national debt increases
  • debt interest payments are increased leaving less money for other areas of spending
  • crowding out: high government borrowing may mean there is less money available to lend to together private sectors
  • inflation: monetary policy suggests that is the PSNCR is financed by borrowing from banks it could increase the money supply and lead to inflation
27
Q

problems with reducing the national debt (3)

A
  • reducing the debt may involve less government spending which could increase unemployment as fewer public sector jobs
  • reducing the debt requires increase rates of indirect taxation e.g. VAT resulting in increased income inequality
  • reducing the debt may involve increasing rates of direct taxation like income tax which lower disposable income and may result in less spending and less economic growth
28
Q

what is the circular flow of income (4)

A

its a way of showing how money flows in an economy

draw a circular flow of income diagram

injections - increase GDP
- government spending
- exports
- investments

Leakages - reduces GDP
- tax
- savings
- imports

29
Q

what is national income equilibrium (4)

A
  • circular flow shows national income
  • when injections are the same as leakages then there is an equilibrium
  • if injections are greater than leakages then national income rises and there is economic growth
  • if leakages are greater than injections then national income falls
30
Q

examples of national income fluctuations (3)

A
  • if export decreases then injections decrease so there is a reduction in national income
  • if interest rates increase then more people save which willi increase leakages and reduce national income
  • if income tax is decreases it reduces taxation which reduces leakages and increase the national income
31
Q

what is national income

A

national income is the value of all goods and services that are produced by an economy in a year

32
Q

what is gross domestic product

A

the value of the output of goods and services produced within the UK in a year

33
Q

what is gross national product

A

it is GDP plus the value of output produced overseas by the IK owned resources minus the value of output produced in the UK by foreign owned resources

34
Q

what is net national product

A

this is GNP with depreciation e.g. the loss in value of capital goods during the year

35
Q

what does it mean if national income is expressed in nominal terms

A

it means its value has been calculated by using current prices

36
Q

what is expressing national income in real terms

A

it means measuring output and considereing infaltion so using current prices

37
Q

how is real national income calculated

A

nominal national income x price index of base year/price index of current year

38
Q

the three ways to calculate national income

A
  1. output methods: adds the value of goods and services produced by all firms in both the private and public sector
  2. income method: the income earned by the owners of all resources used in production are added up. transfer payments are not counted e.g. pensions
  3. expenditure method: total spending of individuals, firms, government and foreign buyers on goods and services

so national output = national expenditure = national income

39
Q

use of national income statistics (4)

A
  • measure economic growth and changes in the living standard
  • helps government decision making by assessing the state of the economy
  • compares economic growth and living standards data between countries
  • identify countries that are in need of aid e.g. low national income
40
Q

Difficulties measuring national income statistic (6)

A

Errors and omissions occur in collecting and calculating statistics

people deliberately hide what they earn or what they produce to avoid tax or claim benefits

under recording of output where the production of some goods and services are not recorded because they are not exchanged for money e.g. housework

over recording of output where double counting occurs

over recording of income when transfer pricing is included

issues with changing the value of money e.g. inflation means money loses value. this must be considered when comparing national income to different years

41
Q

difficulties with comparing national income statistics (7)

A
  • methods of calculating national income may differ over time or between countries
  • standard of living is measured by income per person so population figures also need to be correct
  • figures do not show difference in working condition or hours worked between countries
  • no difference in income distribution or equality across a population are shown in the national income figure
  • social costs such as pollution are not taken into account
  • spending on defence or prisons may increase national income but does not benefit the standard of living of people and not desired by many
  • inflation must be taken into account so figures depend on accuracy of inflation figures
42
Q

what is the multiplier

A

the multiplier effect refers to the increase in final income arising from any new injection of spending

43
Q

the multiplier effect described (6)

A

changes in injections of leakages in the circular flow cause a greater overall change in the value of the economy

if injections increase and leakages decrease it willi have a positive effect on the multiplier

if leakage increase and injection decrease it will have a negative effect

marginal prosperity to consume measures how much extra income is spent

marginal prosperity to save measures how much extra income is saved

formula for multiplier = 1/MPS

44
Q

what is the importance of the multiplier (3)

A

an increase in injections into the circular flow of income will increase national income by more than the increase in injections

a decrease in injection willi decrease the national income by more than the initial decrease

allows the government how much they need to spend in order to improve the overall economy

45
Q

powers scotland has from the scotland (5)

A
  • new rate of income tax
  • new borrowing power for the government
  • full control of stamp duty, land tax and landfill tax
  • power to introduce new taxes, subject to agreement of the UK government
  • Scotland’s ministers have power relating to drug misuse, drink driving limits and national speed limits
46
Q

why is Scotland budget deficit different than the UK as a whole (7)

A
  • Scottish government having devolved powers to adjust some benefits
  • Scottish government having devolved powers to set income tax bands and rates
  • spending on infrastructure projects like the new forth crossing or Edinburgh trams
  • free prescriptions
  • free university fees
  • free elderly home care
  • no air passenger duty for under 16s
47
Q

Positive effect if Scotland was to increase income tax (3)

A
  • extra tax revenue from income tax can be spent on benefits/social services resulting in a higher standard of living
  • increased income tax can lead to more distribution of income in Scotland
  • increasing income tax leads to lower inflation due to decrease in demands
48
Q

Negative effects if Scotland was to increase income tax (4)

A
  • consumers have less disposable income to spend
  • lower demand in Scotland and less income/profit for businesses
  • less profit for business could result in business closure which could lead to higher unemployment
  • business closure/higher unemployment could lead to lower economic growth

economics exam (14 decks)

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