Y2 - The role of the state in the macroeconomy Flashcards
What are the three types of public finance?
- Public expenditure
- Taxation
- Public sector borrowing
What are public expenditure objectives?
- Manage economy (fiscal)
- Provide public goods
- Redistribute income
- Reduce external costs
Define public expenditure
Expenditure by the central government, local authorities and public sector organisations
- Capital (LT investment), current (day-day) and transfer payments (payments with no exchange = JSA)
What are factors influencing the size of public expenditure?
- Level of GDP
- Demand for public services (income elastic)
- Size/age of population
- Political agendas/priorities
- State of economy (recession = automatic stabilisers)
- Rate of inflation (more = more)
What are factors influencing changing composition of public expenditure?
- Ageing population
- Number of school children
- Rising rents
= austerity measures will decrease this
What are factors influencing public expenditure as % of GDP?
- Productivity and growth (more = less)
- Living standards
- Crowding out
- Level of tax
- Equality
Define resource crowding out
Economy is at full employment and public sector expansion leads to shortage of resources in private sector
Define financial crowding out
When expansion of state sector is financed by more gov borrowing = more demand for loanable funds = higher interest rates and crowds out private sector investment
What are the objectives of taxation?
- Manage economy
- Raise rev for public expenditure
- Redistribute income
- Influence pattern of expenditure
- Internalise external costs
Define progressive tax
Taxes in which the % of income paid rises with income
Define proportional taax
Taxes in which % of income paid remains constant as income rises
Define regressive tax
Taxes in which % of income paid falls as income rises (VAT)
Describe the graph for the 3 types of tax
y-axis = % income paid in tax, x-axis = taxable income A = y=x^2 graph (only half for positive x) -- progressive B = straight horizontal line -- proportional C = Demand curve -- regressive
Define direct taxes
Taxes levied on income and wealth (e.g. income tax, corporation tax, capital gains tax)
Define indirect taxes
Taxes on expenditure (e.g. VAT)
What are the effects of changes in direct tax? (7)
- Incentive to work (decrease for employed and unemployed)
- Tax revenues (laffer curve)
- Income distribution (more equal = more progressive)
- Real output/employment (more tax = less AD = less output)
- Price level (less AD = lower prices)
- Trade balance (lower disp income = less consumption = less imports = increase trade balance)
- FDI (less inward FDI)
What are the effects of changes in indirect tax?
- Incentive to work = more (if VAT up)
- Tax revenues (VAT up = more rev)
- Worse income distribution
- Less output and employment
- Higher price level in SR but lower in LR (as AD falls)
- Little impact on trade balance
- Less FDI as AD falls
What determines the effects of changes in taxation?
PED and PES of product
- Inelastic PED = consumers worse off than producers
Define fiscal deficit
When public spending is greater than the tax revenues (in a particular year)
Define national debt
The cumulative total of past gov borrowing
- Total sum owed by a gov to holders of gov bonds (outstanding debts accumulated over time)
What are the two types of public sector finances?
- Automatic stabilisers = recession = more unemployed = more JSA = automatically more gov spending and less tax rev
- Discretionary fiscal policy = deliberate changes in public expenditure and taxes to influence consumption
Define cyclical deficit
Proportion of a country’s budget deficit that reflects changes in the economy cycle (finances linked to trade cycle = increase in recession)
Define structural deficit
Fiscal deficit which remains when the economy is normal and output gap is 0
What are the factors influencing size of fiscal deficit?
- State of economy
- Discretionary fiscal policy
- Demographic factors
- Efficiency of tax collection/avoidance/evasion
- Interest on national debt
What are the factors influencing size of national debt?
- Fiscal deficit/surplus
- Wars (more borrowing)
- State of economy
- Gov measures (LT and immediate)
What are the problems with persistent deficits?
- Crowding out
- Fall in confidence = less FDI
- More interest repayments on national debt
- Inflation
- Loss of AAA rating (higher LR interest rates = countries less willing to lend)
What are measures to reduce fiscal deficits and national debts?
- Less public expenditure
- More taxation
- More policies to increase growth
HOWEVER = could lead to less AD and less tax rev
What are measures to reduce poverty and inequality?
- More education = more employable
- NMW
- More progressive taxation
- More benefits (but lots of problems)
What are examples of external shocks?
- Natural hazard
- Bursting of asset price bubbles
- Terrorism
- Bank run
- Fluctuations in oil/commodity prices
What are measures to control TNC’s power?
- Regulate transfer pricing (but v hard)
- Limit gov control on companies (allow monopolies/companies to transfer between different countries)
What are some problems for policy makers?
- Inaccurate info (cannot predict future inflation rate/rely on old data)
- Inability to control external shocks (hard to predict) = manage policies
