Fiscal Policy

A summary of fiscal policy.

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James Fortson
FISCAL POLICY
WHAT IS FISCAL POLICY AND HOW CAN IT BE USED?
Fiscal policy may be used to affect AD; i.e. an increase in
tax and decrease in government spending reduce a
consumer's disposable income less consumption
Less AD.
TAX DESCRIPTION
Income Tax A tax on the income of individuals.
National National insurance contributions are based on a weekly income; this
Insurance money is used for state benefits and jobseekers allowance (JSA).
Corporation Tax A tax on company profits ­ the top rate of tax between 2005-2006 was
30% for firms earning > £1.5 million of profit each year.
Business Rates A local authority tax paid on business property.
Capital Gains A tax based on the difference between the buying price and selling price
Tax of an asset; mainly paid on stocks and shares.
Inheritance Tax A tax on the value of assets left upon death by an individual.
Excise Duties Taxes on fuels, alcohol, tobacco and betting; calculated on the volume
sold.
VAT This is a tax on expenditure and is taxed at 17.5%.
Council Tax A tax imposed on domestic property by local authorities.
GOVERNMENT DESCRIPTION
SPENDING
1. Social Protection Includes benefits and pensions.
2. Health Second largest area of spending ­ NHS.
3. Education Schools, colleges and Universities.
4. Public Order/ Safety The police and fire-fighters.
5. Defence The navy and airforce.
GOVERNMENT BORROWING
Public Sector Net Cash Requirement (PSNCR):
The amount of money that the government
needs in one financial year ­ it measures the
annual borrowing requirement of the
government sector in the economy.
National Debt: The total amount of debt the
government has accumulated, but still needs to
pay back over a period of time.
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James Fortson
If the government demands more loanable funds (by borrowing from banks or issuing
treasury bonds) then the interest rate will rise (see diagram).
FISCAL RULES (UK AND EU)
1. Golden Rule (UK)
2. Sustainable Investment Rule (UK)
3. Stability and Growth Pact (EU)
NEW LABOUR'S FISCAL LEGACY
Research suggests that a more stable economy was formed when the UK left the
ERM in 1992 (not when the Bank of England was made independent). This had
already reduced inflation in the early 1990's.…read more

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