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macroeconomics > section 5 > Flashcards

section 5 Flashcards

1
Q

what is fiscal policy

A

the manipulation of…
government spending
taxation
budget balance
… to achieve macro objectives

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2
Q

who implements fiscal policy in the uk

A

the government, in particular the treasury and the chancellor of the exchequer

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3
Q

what is ‘the budget’

A

when the chancellor announces changes in government tax, spending, and borrowing plans

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4
Q

what does government expenditure mean

A

the spending by the government in the economy

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5
Q

how much does the government spend in the uk economy

A

between 2023-2024 it was rougly £1200 billion

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6
Q

pattern of government spending in uk from ww2-2008-now

A

in real terms spending has increased most years since ww2 period

but did fall slightly after the 2008 crisis before recovering

spending increased more than proportionally to deal with the covid 19 crisis

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7
Q

why is government spending measured as a % of gdp

A

tells us how much is being spent relative to a countries overall economic activity
and make it easier to compare with other countries

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7
Q

main areas of government spending

A

social protection
education
health
debt interest repayments

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8
Q

social protection

A

includes ares like pensions, housing benefit, supporting people who are risk of exclusion from society (e.g. low income)
dominated by pensions, set to be even more dominating due to aging population`

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9
Q

current spendings

A

day to day spending on providing public services

e.g. public sector wages

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10
Q

capital spending

A

spending on new public infrastructure; increases the amoint of capital stock

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11
Q

transfer payments

A

money provided to provide a welfare safety net with no increase in output

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12
Q

tax

A

compulsory contributions to state revenue, levied by the government

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13
Q

main types of taxes in the uk

A

income tax (tax on income)
national insurance (additional tax on income)
vat (tax on spending)
corporation tax (tax on business profits)

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14
Q

other tax examples

A

excise duties (tax on spending for specific products like alcohol or tobacco)
council tax (tax on property)
inheritance tax (tax on inheritance)

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15
Q

what taxes generate the most government revenue

A

income tax, national insurance and vat

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16
Q

what is taxed more; income or wealth

A

income taxed > wealth taxed

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17
Q

what makes a good tax according to adam smith

A

economical (simple and cheap to collect)
equitable (fair and based upon ability to pay)
convinient (payment and timing)
certain (understood and difficult to evade)
efficient (minimum disincentives)
flexible (responsive to economic conditions)

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18
Q

direct taxes

A

tax levied on income

the tax must be paid by the person it is levied on, cannot be passed on

mostly affects ad

e..g income tax, corporation tax, council tax

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19
Q

indirect tax

A

tax levied on spending

the firm has to pay the tax to the government, but the firm will try to pass on the tax to the consumer in forms of higher prices

mostly affects sras

e.g. vat, excise duties, customs duties

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20
Q

what income bracket pays 20%

A

12,571 - 50,0270

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21
Q

what income tax bracket pays 40%

A

50,271 - 125,140

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22
Q

what income tax bracket pays 45%

A

125,141 and over

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23
Q

average tax rate

A

refers to proportion of total income paid in tax

24
Q

average tax rate formula

A

average tax rate = (total tax paid / total income)

25
Q

marginal tax rate

A

the tax rate (%) paid on one additional unit of income

26
Q

marginal tax rate formula

A

marginal tax rate = (change in tax / change in income)

27
Q

progressive tax

A

as income rises, a greater proportion of income is paid in tax, the average and marginal tax rates rise

28
Q

proportional/flat tax

A

as income increases, the proportion of tax paid stays the same; the average and marginal rates of tax are constant

29
Q

regressive tax

A

as income rises, a smaller proportion of income is paid in tax (higher earners still pay a higher amount of tax, but a smaller proportion of their income); the average and marginal tax rates fall

30
Q

national insurance

A

additional tax on income

both employers and employees pay NICs

NICs are calculated weekly, but the brackets are roughly the same for employees (8 or 2% depending on weekly pay)

31
Q

vat

A

value added tax; a tax on spending

any firm with sales over £85,000 has to charge vat

vat is regressive, those with lower income spend a higher proportion of their income so are disproportionally affected

32
Q

corporation tax

A

tax on firms profits

uk has pretty low corporation tax compared to other countries

33
Q

council tax

A

tax paid to local authorities based on the value of a property- the higher the value of the property, the higher the amount payable

valuations are based on 1991 data

regressive tax

34
Q

what taxes are progressive verus regressive in the uk

A

regressive - national insurance, indirect taxes, council tax

progressive tax - income tax

35
Q

fiscal drag

A

when the tax bracket sare frozen, so more taxpayers are dragged into higher tax brackets as their wages increase hence more tax is paid

36
Q

how could. the goverment make tax system more progressive

A

lower the basic rate of tax

increase the personal allowance threshold

raise the higher and additional rates of income tax

lower the thresholds for higher and additional rates

reduce vat

tax wealth equally/more than income

37
Q

fiscal budget balance

A

the difference between tax revenue and government spending in one year

38
Q

fiscal deficit

A

spending > tax

has to be financed through borrowing

the uk nearly always runs a fiscal deficit

39
Q

how many fiscal surpluses has the uk had since 1945

A

12 =

40
Q

how does the uk finance a deficit

A

borrowing through issuing bond

41
Q

bonds

A

tradable, interest paying IOUs or debt which have to be repaid on a set date

the buyers recieve an annual rate of interest (called a coupon rate)

mostly bought by non bank financial institutions like pension funds or insurance companies

42
Q

national debt

A

the total amount the government owes

every year the fiscal deficit gets added to national debt

uk owes £2.5trillion, nearly 1000% of gdp

43
Q

how much does the uk spend annually to finance the debt

A

borrowing has to be repaid with interest

£120billion every year, 4.5% of gdp and 10% of all government spending

44
Q

how is fiscal policy used to influence the level of AD

A

expansionary (increase spending reduce tax)

contractionary (lower spending increase tax)

neutral (increase tax and spending or reverse)

45
Q

multiplier

A

a change in aggregate demand leads to a larger proportional change in income

46
Q

how can the multiplier be used to justify expansionary fiscal policy or to discredit austerity measures

A

the mutiplier effect means that an increase in net government spenidng will cause real output to increase by more than increase in net government spending- useful in a recession

47
Q

tax influence on supply side of the economy

A

reducing income tax, incentivieses labour market particpation and improves quality of labour

reducing corporation tax incentivises investment and increase productive capacity

48
Q

how does government spending influence the supply side of the economy

A

reducing welfare payments incentivises labour market participation

capital spending can increase productive capacity (e.g. physical capital through infrastructure or human capital through improved quality of labour)

49
Q

how do fiscal policies influence the microeconomy

A

taxes - indirect taxes can be used to reduce spending on demerit goods

subsidies - can be used to increase spending on merit goods

state provision - the provision of a good where there would be. a missing market, i.e. defence (public goods)

50
Q

examples of how fiscal policy can be used to influece pattern of spending

A

spending; spending on electric charging infrastructure to encourage the buying of electric cars

taxes; higher taxes on fuel so people want electric cars over petrol

51
Q

how has direct and indirect tax changed in the uk in recent decade

A

move towards indirect tax over direct tax

52
Q

pros of direct taxation

A

equitable ; based on ability to pay

certainty ; people know how much they will be taxes

economical ; easy to collect

53
Q

cons of direct taxation

A

disincentive effects on running a business / getting a job over £12500

may cause a brain drain as people relocate to avoid taxes on higher paid jobs

easier to avoid ; higher income earners can use tax advisors to minimise tax

54
Q

pros of indirect taxation

A

can be used to address market failure / the pattern of demand (e..g merit goods)

choice ; people have a choice about whether or not to buy certain products

harder to avoid ; the tax is automatically added to the price of products

55
Q

cons of indirect taxation

A

distributional effects ; regressive so increase inequality

inflationary effects ; can contribute to cost push inflation

unintended consequences ; black markets may develop in response (e.g. (imported) cigarettes)

56
Q

cyclical fiscal deficit

A

a deficit caused by a downturn in the economic cycle

57
Q

structural fiscal deficit

A

the part of the budget defiict not caused the economic cycle

a structural deficit is present even when the economy is booming

58
Q
A

macroeconomics (6 decks)

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