Role of the state in the macroeconomy Flashcards
What is Capital spending?
Government spending on long-term investments and assets that are expected to provide benefits over multiple years.
e.g. infrastructure projects, public buildings, and investments in education or healthcare facilities.
–> contributes to economic growth and productivity by enhancing a country’s physical and human capital.
What is current spending?
Current expenditure consists of day-to-day government spending on recurring items, such as salaries, maintenance, and operational costs.
E.g. running government agencies, providing public services, and covering welfare programs like unemployment benefits.
What are transfer payments?
Transfer payments are government payments made to individuals or groups without any expectation of goods or services in return.
Examples: social welfare payments, subsidies to specific industries, and grants to local governments.
Reasons for the changing size and composition of public
expenditure in a global context:
-Public expenditure varies across countries and over time due to factors such as economic conditions, government priorities, demographics, and political ideologies.
-In response to economic crises or changing economic conditions, governments may increase spending to stimulate growth or reduce spending to control deficits.
-Changing demographics, such as an aging population, can lead to increased spending on healthcare and pensions.
-Political ideologies can influence the composition of public expenditure, with some governments favouring social welfare programs and others emphasizing defence or infrastructure.
The significance of differing levels of public expenditure as a proportion of GDP on: Productivity and Growth
Higher levels of public expenditure on investments like education, healthcare, and infrastructure can enhance human capital and physical capital, thereby contributing to productivity and long-term economic growth.
Significance of Differing Levels of Public Expenditure as a Proportion of GDP on: Living Standards
Public expenditure on welfare programs, healthcare, and education can improve living standards by providing essential services and social safety nets.
Significance of Differing Levels of Public Expenditure as a Proportion of GDP on: Crowding Out
Excessive government spending can lead to crowding out, where increased government borrowing raises interest rates, potentially reducing private sector investment and economic growth.
Significance of Differing Levels of Public Expenditure as a Proportion of GDP on: Level of taxation
The level of public expenditure is often linked to taxation policies. Higher public expenditure may require higher taxes, which can impact disposable income and economic incentives.
Significance of Differing Levels of Public Expenditure as a Proportion of GDP on: Equality
Public expenditure can reduce income inequality by providing social support to disadvantaged groups and funding education and healthcare accessible to all citizens.
What is progressive taxes?
Progressive taxes are characterized by higher tax rates as income increases. In other words, individuals with higher incomes pay a higher percentage of their income in taxes.
What is Proportional taxes?
Proportional taxes apply a constant tax rate to all income levels. This means that individuals pay the same percentage of their income in taxes, regardless of their income.
What is Regressive taxes?
Regressive taxes impose a higher tax burden on lower-income individuals compared to higher-income individuals. This occurs because the tax rate decreases as income increases.
The economic effects of changes in direct and indirect tax rates on other variables: Incentives to Work
Changes in tax rates can influence people’s incentives to work. High tax rates on income may reduce the incentive to work more or to engage in productive activities, especially at higher income levels.
The economic effects of changes in direct and indirect tax rates on other variables: Tax Revenues: The Laffer Curve
Initially, as tax rates rise, tax revenues increase. However, at some point, higher tax rates can discourage economic activity, leading to a decrease in tax revenues.
The economic effects of changes in direct and indirect tax rates on other variables: Income distribution
Taxation can be used as a tool to redistribute income. Progressive tax systems can help reduce income inequality by imposing higher tax rates on high-income individuals.
The economic effects of changes in direct and indirect tax rates on other variables: Real output and employment
Changes in tax rates can affect real output and employment. Lower taxes on businesses and investments may stimulate economic growth and job creation.
The economic effects of changes in direct and indirect tax rates on other variables: Price levels
Indirect taxes, such as sales taxes, can influence the price level by increasing the cost of goods and services. This can lead to higher consumer prices.
The economic effects of changes in direct and indirect tax rates on other variables: The Trade balance
Changes in taxes, especially on imports and exports, can affect a country’s trade balance. Higher import taxes (tariffs) can reduce imports but may also lead to retaliation by trading partners.
The economic effects of changes in direct and indirect tax rates on other variables: FDI flows
Tax policies can influence FDI flows. Countries with favourable tax environments for businesses and investors may attract more foreign direct investment.
Discretionary fiscal policy:
A policy which is implemented through one-off policy changes. Discretionary fiscal policy involves deliberate changes in government expenditure and taxes with the intention of influencing aggregate demand.
Automatic Stabilisers:
Policies which offset fluctuations in the economy. These include transfer payments and taxes. They are triggered without government intervention
What is a fiscal budget deficit?
A government has a fiscal (budget) deficit when expenditure exceeds tax receipts in
a financial year.
What is the national debt?
The total debt owed by the government.
What is structural budget deficit?
Budget deficit at full employment.
What is Cyclical budget deficit?
Budget deficit in a recession.
Factors affecting the size of the fiscal budget deficit:
-Tax revenue
-Govt Expenditure
-Unemployment
-Consumer spending
-Firms Profit ( higher profit = more tax revenue for the government from corporate tax)
-Welfare payments e.g. benefits and pensions
Factors influencing national debt:
-Interest rates
-rate of economic growth
-Government policy
