Fiscal policy and Supply-side policies

?
Fiscal policy
Manipulation of government spending, taxation and the budget balance
1 of 60
Fiscal policy instruments - Gov spending and taxation
Influence the size of the circular flow by changing the gov budget,spending and taxes - aims to simulate economic growth and stabilise the economy
2 of 60
In the UK what does the gov spend most of their budget on?
Pensions and welfare benefits, followed by health and education
3 of 60
What is the biggest source of tax revenue in the UK?
Income tax
4 of 60
Expansionary Fiscal Policy diagram
.
5 of 60
Expansionary Fiscal Policy
Increase AD - Gov increase spending or reduce taxes - worsening of the gov budget deficit - gov may have to borrow to finance this
6 of 60
Deflationary Fiscal Policy diagram
.
7 of 60
Deflationary Fiscal Policy
Decrease AD - Gov cut spending or raise taxes - reduces consumer spending - improvement of the gov budget deficit
8 of 60
How fiscal policy can be used to influence AS
Reduce income/corporation tax-encourage spending/investment-subsidise training/spend more education-lowers firms costs-they train fewer workers-spend more on healthcare-improve labour force quality-higher productivity-more infrastructure(roads/school
9 of 60
Budget deficit
Expenditure > tax receipts in a financial year
10 of 60
Budget surplus
Expenditure < tax receipts in a financial year
11 of 60
Government debt
The accumulation of the government deficit over time - the amount the government owes
12 of 60
Government deficit/surplus
Difference between expenditure and revenue at any one point
13 of 60
Direct taxes
Imposed on income - paid directly to the gov from the tax payer - income tax,corporation tax,NICs,Inheritance tax - Consumers and firms responsible - generally more progressive
14 of 60
Indirect taxes
Imposed on expenditure on goods and services - increase production costs for producers - increases market price and demand contracts - generally more regressive
15 of 60
Indirect taxes - Ad valorem
Taxes are percentages - VAT - adds 20% of the unit price - main indirect tax in the UK
16 of 60
Indirect taxes - Specific taxes
Set tax per unit - 58p per litre fuel duty on unleaded petrol
17 of 60
Proportional tax (flat tax)
Fixed rate for all tax payers regardless of income - incidence of taxes is equal, regardless of the ability of the taxpayer to pay - encourages people to earn higher incomes - rate of tax paid does not increase
18 of 60
Progressive tax
Increase in the avg rate of tax as income increases - as income increases the proportion of income taxed increases - reduce inequality - lower incomes pay less tax - based on the payer's ability to pay - higher income households more able to pay
19 of 60
How does progressive income tax in the UK work?
Below £10,600 tax not paid, Below £31,785 20% tax, between £31,786-£150,000 40% tax, above this 45% tax
20 of 60
Regressive tax
Does not relate to income - those on lowest incomes have a higher avg rate of tax - the proportion of income paid as tax is higher for those on lower incomes than those on higher incomes - less equitable distribution of income
21 of 60
Give two examples on regressive taxes in the UK
London Congestion Charge and Council Taxes
22 of 60
Principles of taxation ('Canons of taxation') - criteria taxes are judges by
Cost of collecting must be low relative to yield-timing/quantity paid obvious-timing/way of paying should be convenient-should be imposed depending on ability to pay(equitable)-shouldn't limit efficiency-compatible global tax system-adjust inflation
23 of 60
Limitations of Fiscal policy
Imperfect information-inefficient spending, Time lag, Gov borrow from private sector-fewer funds for pri sec - crowding out,relies on size of multiplier,IR ^ not effective,gov spends too much-difficult to pay back/borrow in future
24 of 60
Current government expenditure
Spending which recurs - consumed and last for a short period of time - drugs for the health service
25 of 60
Capital government expenditure
Spent on assets - can be used multiple times - roads or building a school
26 of 60
Transfer payments
Welfare payments from gov-min standard of living for low incomes(reduce inequality)-no goods or services are exchanged for transfer payments - JSA,Income support,Child benefit,State pension
27 of 60
Education spending in the UK
Remained relatively constant - protected so it does not fall, but it also does not increase much either
28 of 60
Social security payments
Payments from the government to assist those who have low incomes
29 of 60
Defence spending
Has been falling in the UK - area the gov spends the least on
30 of 60
Significance of differing levels of public expenditure as a proportion of GDP on - Productivity and growth
Spend money on Supply-side policies-improve human capital and boost LR growth-important for competitiveness-invest in youth apprentice schemes-Education and training-higher value products and productivity
31 of 60
Significance of differing levels of public expenditure as a proportion of GDP on - Crowding out
Gov funds spending using taxes or running a budget deficit-fewer funds in private sector-gov is borrowing-crowds them out market-if gov borrows a lot and IR increase - discourage spending/investment
32 of 60
Significance of differing levels of public expenditure as a proportion of GDP on - Level of taxation
Tax rate might increase if gov debt get too high - confidence lost in gov ability to repay debt-raise IR to encourage investors to buy bonds to finance debt - higher taxes and austerity measures
33 of 60
Significance of differing levels of public expenditure as a proportion of GDP on - Equality and living standards
Progressive taxes used to reduce inequality - re distributive policies and welfare payments(income support)-gov spend on housing and provision of public services(education and healthcare)-equal opportunities-good standard of healthcare and education
34 of 60
Crowding out
Reduction in private sector investment - can be caused by deflationary fiscal policy and increase in gov borrowing, can also refer to the gov provision of a good or service otherwise provided by private sector
35 of 60
What is the size of government spending in the UK?
About 40% of GDP - citizens have a lower tax burden than in a country such as Switzerland where gov spending is 60% of GDP
36 of 60
Government budget
Compromise of tax revenues and government expenditure
37 of 60
Balanced budget
Expenditure = revenue
38 of 60
What happens to gov debt if the gov is continuously running a deficit?
The size of the debt increases
39 of 60
What happens to gov debt if the gov reduces the size of their deficit?
The rate of increase of the total debt is slower, but the debt is still increasing
40 of 60
When does the size of national debt decrease?
When the gov runs a budget surplus
41 of 60
Current goal of the UK gov in relation to the budget
UK gov is trying to reduce the size of the deficit and eventually run a budget surplus by 2019-2020, at which point they will start paying off the debt
42 of 60
Cyclical deficit
Temporary deficit - related to the business cycle - might occur during a recession - when gov increase spending to stimulate the economy
43 of 60
Structural deficit
Deficit which is due to an imbalance in the revenue and expenditure of the gov, so it exists at every point in the business cycle
44 of 60
The consequences of budget deficits and surpluses for macroeconomic performance
Fiscal deficit - inflationary if it increase AD, more gov spend - crowding out of priv sector firms - fewer funds in priv sector - increased IR - gov has to offer investors an attractive rate in order to encourage them to buy the debt
45 of 60
The significance of the size of the national debt
Cost of borrowing could increase -by borrowing money the gov is increasing demand for credit in the economy - if confidence is lost in the gov - might have to raise IR to encourage investors to buy bonds- they can finance debt-higher taxes/austerity
46 of 60
The role of the Office for Budget responsibility
Analysis of the UKs finances, 5year forecast-impact of tax/spending changes,judge the gov against fiscal targets-balance the budget 5 years ahead-assess the likelihood of gov meeting targets-scrutinise tax welfare measures,sustainability PS finances
47 of 60
Supply side policies
Aim to improve the long run productive potential of the economy
48 of 60
Can the economy experience supply-side improvements without government intervention?
Yes - in the private sector supply side improvements such as productivity,innovation and investment can occur without gov intervention
49 of 60
Strengths of supply side policies
Only policies which can deal with structural unemployment - the labour market can be directly improved with education and training, UK more competitive,higher productivity,improve standard of living,long term frictional,encourages small businesses
50 of 60
Weaknesses of supply side policies
Demand-side policies better at dealing with cyclical unemployment-reduce the size of a negative output gap - shift AD to the right, Time lags, Market based supply-side policies (reducing tax rate) could led to more unequal distribution of wealth
51 of 60
Market-based policies
Limit the intervention of the government and allow the free market to eliminate imbalances - forces of supply and demand
52 of 60
Interventionist policies
Rely on the government intervening in the market
53 of 60
Free market supply-side policies - To increase incentives
Reducing income and corporation tax - encourage spending/investment-increase LR productive potential-improves the underlying trend of economic growth
54 of 60
Free market supply-side policies - To promote competition
Deregulating or privatising the public sector - firms can compete in a competitive market - improve economic efficiency
55 of 60
Free market supply-side policies - To reform the labour market
Reducing NMW - allow free market forces to allocate wages and the labour market clears, Reducing trade union power - employing workers less restrictive - increases the mobility of labour - labour market more efficient
56 of 60
Interventionist supply-side policies - To promote competition
Stricter government competition policy - help reduce the monopoly power - ensure smaller firms can compete
57 of 60
Interventionist supply-side policies - To reform the labour market
Improve the geographical mobility of labour by subsidising the relocation of workers and improving the availability of job vacancy information
58 of 60
Interventionist supply-side policies - To improve skills and quality of the labour force
Subsidise training or spend more on education - lowers costs for firms - have to train fewer workers, Spending more on healthcare - improve the quality of the labour force - contributes towards higher productivity
59 of 60
Interventionist supply-side policies - To improve infrastructure
Governments spend more on infrastructure - Improving roads and schools
60 of 60

Other cards in this set

Card 2

Front

Influence the size of the circular flow by changing the gov budget,spending and taxes - aims to simulate economic growth and stabilise the economy

Back

Fiscal policy instruments - Gov spending and taxation

Card 3

Front

Pensions and welfare benefits, followed by health and education

Back

Preview of the back of card 3

Card 4

Front

Income tax

Back

Preview of the back of card 4

Card 5

Front

.

Back

Preview of the back of card 5
View more cards

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all 4.2.5 resources »