Macro 15 - The budget position. Flashcards
Define the government budget?
The amount of money the government has to to spend form tax revenue or from borrowing.
What is a budget deficit?
Government spending is greater than tax revenue.
G>T.
what is a budget surplus?
Tax revenue is greater than government spending.
T>G
How is a budget deficit financed?
Sale of bonds - piece of paper which they sell.
What are UK government bonds and EU bonds called?
UK - Gilts.
EU- Eurobuns.
What is the problem of running a budget deficit in terms of a countries credit rating?
- Harder to raise money in the bond market.
- The interest placed on your bond will increase, because investors may be worried that you will not be able to pay back the loan.
What is the problem with running a budget surplus?
- leakages from the circular flow, due to higher savings - AD will shift left.
- Quality of life may fall.
come back to finish chapter - bonds
how to draw expansionary and contractionary fiscal policy on diagrams:
expansionary- shift AD to the right
contractionary- shift AD to the left
Use keynesian AS curves.
what are budget deficits that are run for a long time called?
structural budget deficits
what are deficits that are caused by automatic stabilisers called?
cyclical budget deficits.
Define national debt?
The sum of national annual budget deficits.
What is the difference between budget deficit and national debt?
Budget deficit is when G>T in a given year, National debt is the accumulation of all budget deficits.
consequences of having national debt.
- crowding out argument.
- Affects credit rating.
- Interest placed on bonds increases.
- Opportunity costs for borrowing money - interest money could be spent elsewhere.
what are the 3 types of taxes?
progressive.
proportional.
regressive.
what are progressive taxes?
When tax burden increases with income - higher proportion form high income earners.
what are proportional taxes?
taxe rate is fixed - everyone pays same rate. Eg: mongolia 10%.
what are regressive taxes?
tax burden decreases with income - high proportion from low income earners.
all 3 types of taxes on a diagram
define direct taxes?
taxes on income/profit/wealth.
define indirect taxes?
taxes on goods and services.
2 advantages of progressive taxation?
- Takes more from those who can afford to pay them, they can afford basic needs comfortably.
- allows low wage earners to be charged no tax at all, preventing poverty.
2 disadvantages of progressive taxation?
- Disincentivises work, high income earners lose much of their salary, so many stop opening businesses.
- people may try and avoid paying tax using complex accounting structures to pay the least tax possible.
2 advantages of regressive taxation?
- Easy to administrate, same taxes charged per item.
- Targets demerit goods which are more likely to be used by low income groups. - Can help reduce market failure - internalising the externality.
2 disadvantages of regressive taxation?
- takes a much higher percentage of low income earners and punishes the poor.
- goods may be addictive, price inelastic demand meaning people wont stop using them.
what is a flat rate tax system?
everyone pays the same percentage of tax.
