fiscal policy

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  • Created by: annie.m13
  • Created on: 27-04-18 16:54
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  • fiscal policy
    • is the use of government spending or taxation to achieve the macroeconomic objectives
      • works by changing AD
    • types of fiscal policy
      • discrestionary
        • policies that are one off
      • automatic
        • where the ecomony can be stabalised by fiscal drag and fiscal boost
          • fiscal drag
            • as income rises, the rich pay more tax and the poor come off benifits and start to pay that = an moderated increase in disposable income
          • fiscal boost
            • as incomes fall in a recession the impact of falling incomes is softened as people pay less tax
              • as people fall onto benefits they spend more than if they were paying tax which slows the reduction in AD
    • policies
      • gov expenditure
        • reasons the public sector spend
          • to supply good and services that the private sector would fail to do so - market correction/intervention
          • to achieve supply side improvements
            • e.g. spending on education and training
          • to boost AD
          • to reduce negative externalities
            • e.g. setting pollution limits (money spent of admin)
          • to subsidise industries
            • to supply good and services that the private sector would fail to do so - market correction/intervention
          • to help redistribute income
            • the welfare state
    • fiscal deficit
      • when there is a budge deficit
        • gov must borrow money
          • local govs (counclis) can also borrow
          • local borrowing + centural borrowing = public sector net cash requirement (psncr)
            • local govs (counclis) can also borrow
      • usually happens when the economy experiences a downturn and tax revenue falls while welfare payments rise
    • public sector spending
      • created by keynes
      • two types of spending
        • current spending
          • expenditure on wages and raw materials
          • short term
        • capital spending
          • physical assets
          • long term
      • evaluation
        • advantages
          • can move AD
          • if on capital items, infrastructure improves = ecom growth
          • can be targeted
            • e.g. on job creation, reducing unemployment, achieving more equity etc
        • disadvatages
          • time-lag between spending and the results
          • can be inflationary
          • trade off between unemployment and inflation
            • can be inflationary
    • revenue and tax policy
      • revenue is raised from
        • taxation
          • changing tax rates
            • used to control household spending and AD
            • income tax can be adjusted by changing the
              • tax free allowance
              • basic tax rate (least amount of tax)
              • number of tax bands
                • range of income in each band
                  • income tax can be adjusted by changing the
                    • tax free allowance
                    • basic tax rate (least amount of tax)
                    • number of tax bands
                      • range of income in each band
            • evaluation
              • advantages
                • indirect tax can be targeted
                  • e.g. on demerit goods
                • can stabilise the macroeconomy through fiscal drag and boost
                  • fiscal boost
                    • as incomes fall in a recession the impact of falling incomes is softened as people pay less tax
                      • as people fall onto benefits they spend more than if they were paying tax which slows the reduction in AD
                  • fiscal drag
                    • as income rises, the rich pay more tax and the poor come off benifits and start to pay that = an moderated increase in disposable income
                • discretionary changes regulate AD
                  • discrestionary
                    • policies that are one off
                • can help reduce the income gap
              • disadvantages
                • making chnages is very complex
                • time lag between changes in tax and household spending
                • higher tax may disincentivise work and enterprise
          • national insurance
            • a compulsory contribution from both employer and employee to provide workers with benefits when needed
          • charges
            • for using resources under the govs control
              • e.g. parking, TV licenes
          • privatisation
            • one off income
          • borrowing
            • from: commercial banks, sellign bills and bonds
        • local gov revenue
          • council tax
          • grant from centural gov

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