fiscal policy
- 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
- as incomes fall in a recession the impact of falling incomes is softened as people pay less tax
- fiscal drag
- where the ecomony can be stabalised by fiscal drag and fiscal boost
- discrestionary
- 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
- reasons the public sector spend
- gov expenditure
- 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
- gov must borrow money
- usually happens when the economy experiences a downturn and tax revenue falls while welfare payments rise
- when there is a budge deficit
- 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
- current spending
- 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
- advantages
- 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
- range of income in each band
- income tax can be adjusted by changing the
- 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
- as incomes fall in a recession the impact of falling incomes is softened as people pay less tax
- 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
- discretionary changes regulate AD
- discrestionary
- policies that are one off
- discrestionary
- can help reduce the income gap
- indirect tax can be targeted
- disadvantages
- making chnages is very complex
- time lag between changes in tax and household spending
- higher tax may disincentivise work and enterprise
- advantages
- changing tax rates
- 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
- for using resources under the govs control
- privatisation
- one off income
- borrowing
- from: commercial banks, sellign bills and bonds
- taxation
- local gov revenue
- council tax
- grant from centural gov
- revenue is raised from
- is the use of government spending or taxation to achieve the macroeconomic objectives
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