lesson 10: fiscal policy Flashcards
what does fiscal policy involve?
changes in government spending and taxation
what is a cyclical deficit associated with and what is a structural one associated with?
cyclical deficit is associated with changes in economic activity and moves with the changes in the economic cycle
structural deficit is not affected by the economic cycle and is a result of fundamental imbalances in tax and revenues
what are the arguments for and against a budget deficit?
for: 1. economy is slow - gov steps in to inject
- gov can kick start the economy - crowd in the private sector - encourage them to invest - accelerator kicks in
- structural deficit can be justified if money is being used to improve the supply side - makes us more competitive - if we boost growth - debt to GDP ratio falls
against: 1. too much government involvement - crowds out the private sector (show on a PPC shifting up B to A)
- budget deficit is financed through borrowing - raises national debt - debt must be serviced - effects future generations
- any expansionary policy carries the risk of us getting too close to Yfe - demand pull inflation
when you think budget deficit whats the two things gordan says to remember?
expansionary
injections NEEDED
what is progressive tax? what is it used for?
proportion of income paid in tax rises as income increases
can be used to reduce inequality
why do governments use indirect taxes?
to alter the relative prices of the goods and services
to change patterns of consumption
(usually for demerit goods like sugar tax on drinks)
in the progressive and regressive taxes how does marginal and average tax rates work?
progressive marginal tax rate is greater > average tax rate
regressive marginal tax rate is less < average tax rate
in terms of taxes what does efficiency call for and what does equity call for?
efficiency - greater incentive to work and enterprise to increase growth rates
equity - progressive tax rate and transfer payments to the poorer people
what is equity?
equity refers to fairness or justice in the distribution of wealth, income, and resources. It does not necessarily mean equality (where everyone gets the same), but rather ensuring that opportunities and outcomes are fair, often by considering individual needs and circumstances.
what problem does equity and efficiency carry?
the danger of reducing the incentive to work
facts on taxes on income
easy to collect, certain and equitable when it is progressive
income tax is the main source of government revenue in the uk
easy to evade and therefore may carry the unintended consequence of disincentivising hard work
facts about indirect tax
ad valorem or specific
used to raise revenues but also to switch spending (demerit goods)
facts about taxes on capital and wealth
hard to avoid with some assets like houses but easy to avoid with others like putting cash in a swiss bank
what are the three types of government spending?
capital (spending on investment goods)
current (day to day)
transfer (tax payers to benefits)
what is demand led spending?
led by demand
eg if unemployment rises so does benefits
they alter as we pass through different stages in the economic cycle
