Role of state in the macroeconomy Flashcards
What is government consumption expenditure?
spending by government on goods and services
What is government capital expenditure?
spending by government on capital projects
Which body sets bank base rates in the UK?
Bank of England
Give three examples of government consumption expenditure
- education
- healthcare
- salaries of civil servants
Give two examples of government capital expenditure.
roads
hospitals
What’s the difference between universal and means-tested benefits?
- universal - paid to everyone meeting certain non-income/assets related criteria
- means-tested - depends on a person’s income or assets or both
Approximately what % of GDP is government expenditure in UK?
20-30%
Name two countries with government expenditure significantly lower % of GDP than UK
eg USA, Germany, Spain, Switzerland
Give three reasons why higher public expenditure might lead to smaller private sector.
- fewer workers available to work in private sector
- higher interest rates if budget deficit so higher cost of borrowing for private sector
- less demand for private sector if more provided by government
What effect might more public sector have on productivity (give one reason for it to increase, one for it to decrease)?
- may be less incentive to be efficient (if no competition or incentive to maximise profits) so productivity falls
- but may be economies of scale, increasing productivity
What two effects will high public expenditure have on future public expenditure on public services?
(1) Spend money now so may not need to spend it in fututre
(2) Higher public debt so have to spend money on interest payments rather than public services
Give two reasons why higher public expenditure improve economic growth of private sector?
- Improved infrastructure, eg transport, communications, healthcare, education, can make firms more efficient so more potential for growth
- multiplier effect through more pay to public sector workers who then spend more with private sector
What are direct taxes?
Tax levied on income, eg personal income tax
Is income tax in UK progressive or regressive?
progressive, ie those earning more pay higher %
Give two examples of indirect UK taxes.
VAT
excise duties
Are indirect taxes progressive or regressive?
regressive, as higher proportion of income spent by lower income households on goods with excise duties, plus higher income households save higher proportion
What is a key issue with progressive taxation?
Reduces incentive to work
What is one problem with corporation tax?
reduced incentives - may discourage foreign direct investment into UK or encourage UK firms to invest elsewhere, or discourage from setting up company at all (or from being efficient)
What effect will higher income tax have on multiplier?
reduces multiplier through lower marginal propensity to consume, although can be offset to some extent by higher government spending
Does an increase in tax rate always lead to rise in tax revenue?
no, as higher tax revenue from rate increase but offset due to disincentives
What does the Laffer curve show?
relationship between tax rate and tax revenue
What shape is the Laffer Curve?
inverted U-shape
How is government budget deficit calculated?
government expenditure less government revenue
What is a fiscal deficit?
when government expenditure greater than government revenue
Define national debt.
total government debt based on accumulated past deficits offset by past surpluses
What is a cyclical deficit?
budget deficit that occurs during downturn of business cycle but disappears during upturn
What is a structural deficit?
deficit that persists even when economy is at full employment
What shape do monetariest believe the aggregate supply curve is?
vertical
What impact do monetarists think increases in aggregate demand will have?
- prices increase
- no change in real output
- equilibrium at natural rate of output
What shape do Keynesians think aggregate supply curve is?
sloping upwards then vertical
Do Keynesains think equilibrium only occurs at full employment?
no
What is crowding out?
when government expenditure raises cost of borrowing thus reducing private sector expenditure
What is crowding in?
when decrease in government expenditure reduces cost of borrowing thus increasing private sector expenditure
What are automatic stabilisers?
process by which government expenditure and revenue varies over busines cycle, helping to stabilise economy without government intervention
Give two examples of automatic stabilisers.
- In recession, more unemployed so more government expenditure on benefits
- In recession, tax revenues fall
If there is full employment, what effect will increased government expenditure have?
pushes up prices with no change to real output
Give two examples of reasons for government expenditure due to market failure.
- taxes to correct effect of externalities such as pollution
- expenditure to ensure provision of public goods such as street lighting
Why might X-inefficiency be an argument for privatisation?
if anagers of public sector services aren’t sufficiently accountable for their actions, leading to inefficiency
Will a switch from direct to indirect taxes increase or reduce inequality?
increase
Why did Liz Truss focus on cutting taxes in her ill-fated spell as prime minister in 2022?
to fuel economic growth by reducing disincentives
Give three reasons why tax collection may be difficult in developing countries.
- ineffective administration system
- many living in absolute poverty
- can’t effectively tax those in subsistence (eg grow enough to eat but don’t otherwise work)
Name a country thtqa printed money in late 2000s leading to hyperinflation
Zimbabwe
What is the Golden Rule of Fiscal Policy?
Over economic cycle, net government borrowing will be for investment only, not for current spending.
Who introduced theGolden Rule of Fiscal Policy?
UK Labour government (1997-2010)
Labour government (1997-2010) introduced rule to keep public sector debt below 40% of GDP - what two key events caused this to be broken over that period and later?
financial crisis
Covid-19 pandemic
What is transfer pricing?
process by which a transnational company can minimise its global tax liability by manipulating internal transactions between its branches in different countries
Give three general problems that make it difficult to design and implement macroeconomic policies.
- information inaccuracy (often just that it’s out of date)
- uncertainty abotu future
- external shocks
What was the Coronovirus Job Retention Scheme (known as “the furlough scheme”)?
UK government provided support for people unable to work due to lockdown
How did UK government finance the furlough scheme and loss of tax revenue due to pandemic / lockdowns?
increase in quantitative easing
- risk/uncertainty
- interruption of supply chains, eg energy (with lots of oil and natural gas normally imported from Russia into Europe) and grain
- inflation (due to oil and grain supplies reducing)
