key terms theme 4 Flashcards
What is current expenditure?
This is day-to-day expenditure on goods and services, e.g. salaries of teachers, drugs used by the NHS.
What is capital expenditure?
This relates to expenditure on long-term investment projects such as new hospitals and roads.
What are transfer payments?
These are payments made by the state (from tax revenues) to individuals in the form of benefits for which there is no production in return; examples include child benefit, state pensions and the jobseekers’ allowance.
What is crowding out?
The view that a rapid growth of government spending leads to a transfer of scarce productive resources from the private sector to the public sector where productivity might be lower.
What is resource crowding out?
Occurs when the economy is operating at full employment and an increase in public expenditure results in insufficient resources being available for the private sector.
What is financial crowding out?
Occurs when increased public expenditure or tax cuts are financed by increased public sector borrowing, so increasing the demand for loanable funds and driving up interest rates. This reduces private sector investment.
What are direct taxes?
Direct taxation is levied on income, wealth and profit, e.g. Income tax, National insurance contributions, Capital gains tax, Corporation tax.
What are indirect taxes?
Indirect taxes are levied on spending by consumers on goods and services, e.g. VAT, or specific taxes on fuel and alcohol, car tax.
What are progressive taxes?
As income rises, a larger percentage of income is paid in tax (e.g. UK income tax).
What are proportional taxes?
The percentage of income paid in tax is constant, no matter what the level of income.
What are regressive taxes?
As income rises, a smaller percentage of income is paid in tax (for example, excise duties on tobacco, alcohol in the UK).
What is fiscal drag?
A phenomenon that occurs when inflation pushes taxpayers into higher income tax brackets, resulting in higher tax payments.
What is the Laffer curve?
A curve which shows that at low levels of taxation, tax revenues will increase if tax rates are increased; however, if tax rates are high, then a further rise in rates will reduce total tax revenues because of the disincentive effects of the increase in tax.
What are automatic stabilisers?
A process by which government expenditure and tax revenue varies with the business cycle, thereby helping to stabilise the economy without any conscious intervention from government.
