Fiscal policy and Supply-side policies

Fiscal policy
Manipulation of government spending, taxation and the budget balance
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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
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In the UK what does the gov spend most of their budget on?
Pensions and welfare benefits, followed by health and education
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What is the biggest source of tax revenue in the UK?
Income tax
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Expansionary Fiscal Policy diagram
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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
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Deflationary Fiscal Policy diagram
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Deflationary Fiscal Policy
Decrease AD - Gov cut spending or raise taxes - reduces consumer spending - improvement of the gov budget deficit
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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
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Budget deficit
Expenditure > tax receipts in a financial year
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Budget surplus
Expenditure < tax receipts in a financial year
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Government debt
The accumulation of the government deficit over time - the amount the government owes
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Government deficit/surplus
Difference between expenditure and revenue at any one point
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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
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Indirect taxes
Imposed on expenditure on goods and services - increase production costs for producers - increases market price and demand contracts - generally more regressive
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Indirect taxes - Ad valorem
Taxes are percentages - VAT - adds 20% of the unit price - main indirect tax in the UK
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Indirect taxes - Specific taxes
Set tax per unit - 58p per litre fuel duty on unleaded petrol
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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
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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
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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
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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
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Give two examples on regressive taxes in the UK
London Congestion Charge and Council Taxes
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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
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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
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Current government expenditure
Spending which recurs - consumed and last for a short period of time - drugs for the health service
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Capital government expenditure
Spent on assets - can be used multiple times - roads or building a school
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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
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Education spending in the UK
Remained relatively constant - protected so it does not fall, but it also does not increase much either
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Social security payments
Payments from the government to assist those who have low incomes
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Defence spending
Has been falling in the UK - area the gov spends the least on
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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
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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
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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
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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
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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
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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
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Government budget
Compromise of tax revenues and government expenditure
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Balanced budget
Expenditure = revenue
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What happens to gov debt if the gov is continuously running a deficit?
The size of the debt increases
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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
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When does the size of national debt decrease?
When the gov runs a budget surplus
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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
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Cyclical deficit
Temporary deficit - related to the business cycle - might occur during a recession - when gov increase spending to stimulate the economy
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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
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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
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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
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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
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Supply side policies
Aim to improve the long run productive potential of the economy
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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
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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
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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
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Market-based policies
Limit the intervention of the government and allow the free market to eliminate imbalances - forces of supply and demand
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Interventionist policies
Rely on the government intervening in the market
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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
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Free market supply-side policies - To promote competition
Deregulating or privatising the public sector - firms can compete in a competitive market - improve economic efficiency
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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
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Interventionist supply-side policies - To promote competition
Stricter government competition policy - help reduce the monopoly power - ensure smaller firms can compete
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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
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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
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Interventionist supply-side policies - To improve infrastructure
Governments spend more on infrastructure - Improving roads and schools
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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

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Back

Preview of the back of card 5
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