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13 - Fiscal Policy Flashcards

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1
Q

What is Fiscal policy?

A

The use of government spending and taxation to try and achieve government policy objectives.

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2
Q

What does it mean when G=T?

A

There is a balanced budget.

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3
Q

What does it mean when G>T?

A

A budget deficit.

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4
Q

What does it mean G<T?

A

Budget Surplus.

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5
Q

Why does a budget deficit occur?

A

When public sector spending exceeds revenue.

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6
Q

How can a budget deficit be eliminated?

A

By cutting public spending or raising taxation.

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7
Q

What is deficit financing?

A

Deliberately running a budget deficit then borrowing to finance the deficit.

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8
Q

What was fiscal policy used for from the 1950s to 1970s?

A

To manage the level of Aggregate demand, and deficit financing.

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9
Q

What is the aim of deficit financing?

A

To achieve full employment and stabilise the economic cycle.

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10
Q

How did Keynesian fiscal policy guide the Covid pandemic?

A

Large amounts of demand pumped into the economy from tax reductions and increased spending.

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11
Q

Which Keynesian policies influenced the use of fiscal policy?

A

An unregulated market economy results in low economic growth. A lack of aggregate demand means that the economy settles into a under employment equilibrium. Government can use fiscal policy in a discretionary way.

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12
Q

What did the government do in the 1990’s?

A

Increased government spending, raised taxes.

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13
Q

What happens when the economy gets nearer to normal capacity level of output?

A

A further increase in government spending or a tax cut inflates the price level.

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14
Q

What is supply side fiscal policy?

A

Creating incentives to work, save and invest. Government spending on retraining schemes.

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15
Q

What does supply side fiscal policy aim to do?

A

Increase the economy’s ability to produce and supply goods.

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16
Q

What did the financial crisis lead to in 2008?

A

The UK government bailed out banks, which led to the largest budget deficit in history.

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17
Q

What does successful fiscal policy lead to?

A

A shift in the LRAS curve rightwards.

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18
Q

What is the objective of collecting tax revenue?

A

To finance the provision of goods such as roads and schools which would either be under provided or not provided.

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19
Q

What are transfers?

A

Things such as the state pension and unemployment benefits. Redistributes income from taxpayers to recipients of these benefits.

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20
Q

What are the reasons for government spending?

A

Effective public and merit goods, A safety net for the poorest in society. Provide necessary infrastructure, manage growth in the economy.

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21
Q

What was the distribution of government spending in 2022?

A

Social protection - 29%. Personal social services - 4%. Health - 20%. Education - 11%. Debt Interest - 10%. Defence - 6%. Industry - 4%. Housing - 3%. Public Safety - 4%. Transport - 5%. Other - 4%.

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22
Q

What was total government spending in 2021/22?

A

£1.05 Trillion.

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23
Q

Why is the amount of spending on the elderly increasing?

A

We have an ageing population.

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24
Q

What is the triple lock?

A

A guarantee that the state pension will rise by the highest measure of either wage increases, CPI inflation, or 2.5%.

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25
What happens to the triple lock during Covid?
It was suspended, as workers came off the furlough scheme, so they were artificially high.
26
What factors are affecting the efficiency of the NHS?
Increased population, longer life expectancy, cost of new drugs.
27
What has happened to education funding since 2000?
It grew substantially from 2002 onwards. Higher education spending has seen cuts in public spending since 2010. Tuition fees have increased.
28
How does the economic cycle affect government spending?
When the economy is in a boom, unemployment falls, so social security spending falls. The opposite is true in a recession.
29
What is demand led spending?
Spending such as unemployment benefits, which falls when unemployment falls.
30
What is debt interest?
Payments by the government to people who have lent to the state.
31
What was the proportion of taxes in 2020?
Income Tax - 26%. National Insurance - 19%. VAT - 18%. Other Individual Taxes - 11%. Corporation Tax - 8%. Council Tax - 9%. Other Taxes - 9%.
32
What is tax?
A compulsory levy made by a government to pay for its activities.
33
Why will the government have to find new sources of revenue?
People are moving away from fossil fuels, and living healthier lifestyles.
34
What is income tax?
The main direct tax, paid on earnings, pensions, benefits, savings and investment.
35
What is national insurance?
A supplementary form of income tax, which is used to fund public services.
36
What is corporation tax?
A tax on company profits.
37
What is VAT?
A tax on spending, paid at 20%, on most goods and services.
38
What are excise duties?
Another form of expenditure tax, levied on the quantity of a good, such as alcohol.
39
What is stamp duty?
Tax paid on the purchase of property, Threshold us £125,000 for residential properties, and £150,000 for non residential properties.
40
What is inheritance tax?
A tax on wealth, at 40% above £325,000.
41
What is capital gains tax?
Levied on the profit of a person makes when selling possessions or investments.
42
What is direct tax?
A tax that can't be shifted to someone liable, levied on income and wealth.
43
What is indirect tax?
A tax that can be shifted by the person legally liable onto someone else.
44
What is progressive taxation?
The proportion of tax you pay increasing as income increases.
45
What are the examples of progressive tax?
Income Tax, Stamp duty.
46
What are the benefits of progressive tax?
Reduces tax burden for those least able to pay, lowest paid will most likely spend low income on essential goods. Collects more tax than regressive tax.
47
What are the disadvantages of progressive tax?
Discourages success, Encourages bigger government.
48
What is regressive taxation?
The proportion of income paid in tax falls as income increases.
49
What is an example of regressive taxation?
Cigarette Duty.
50
What are the advantages of regressive taxation?
More simple, Easier to enforce, lower enforcement cost.
51
What are the disadvantages of regressive taxation?
Disproportionate burden on lowest income households, Exacerbates income inequality, reduces social mobility.
52
What is proportional taxation?
Everybody pays the same rate, no matter income/earnings.
53
What is the purpose of taxation?
Raise sufficient revenue, to pay for government spending, Influences business decisions, making sure people who benefit are the biggest contributors, Intervene in the market, discouraging supply and demand of demerit goods. Provides incentives to work.
54
What are the micro effects of taxation on the economy?
Work incentives, pattern of demand, business investment, Distribution of income and wealth.
55
What are the principles of taxation?
Economy, Convenience certainty, Equity, Efficiency, Flexibility.
56
How is government spending distributed?
Government departments, current spending, capital spending, devolved regions.
57
What are the reasons for government spending?
Effective public and merit goods, a safety net for the poorest in society, provide necessary infrastructure, manage growth in the economy.
58
What is national debt?
The stock of all government borrowing that hasn't been paid back.
59
What are the benefits of a budget deficit?
Government spending can support the poorest in society, can stimulate long term economic growth - such as improvements to infrastructure. Contractionary or expansionary fiscal policies can affect short term economic growth.
60
What are the problems with a budget deficit?
We can't always finance a budget deficit, A debt mountain doesn't always help the government, as it eventually has to be paid back. Budget deficit eventually has to be reduced through lower spending or higher taxes.
61
What is a cyclical budget deficit?
The part of the budget deficit which rises in the downsizing of the economic cycle.
62
What is a structural budget deficit?
The part of the budget deficit which results from structural change affecting the government's finances.
63
What is reproductive national debt?
The government borrowing to finance the building of a motorway or another capital investment, as they're wealth producing assets.
64
What is deadweight national debt?
Long term borrowing to finance current spending, as this is only for short term. e.g. WWII.
65
How can inflation make the deficit better?
If the rate of inflation is greater than the rate at which the budget deficit and borrowing requirement add to the nominal national debt.
66
What is roll over of national debt?
The fact that every year, part of the national debt matures, and the government must sell new debt to raise funds to repay old debt.
67
When was the OBR created?
2010.
68
What are the main role of the OBR?
Economic/ Fiscal forecasting. Evaluating economic performance, sustainability analysis, evaluation of fiscal risks, scrutinise tax and welfare policy.
69
What are supply side policies?
Government economic policies which aim to make markets more competitive and efficient, increase production potential, shifting LRAS curve.
70
What did supply side economics focus on first?
Effects of fiscal policy on the economy, such as government spending, and taxation, then privatisation and trade union reform.
71
What have the supply side improvements been?
Undertaken by the private sector, free market means that propping up uncompetitive firms can be counter productive, as they don't always bring about supply side improvements. Pro free market economists usually prefer non interventionist supply side policy.
72
What is interventionist supply side policy?
Policy which extends the role of the state, limiting the role of markets. Includes government provision of education and training.
73
What does pro free market supply side microeconomic policy include?
Tax cuts, cuts in welfare, privatisation, deregulation.
74
What does supply side reform aim to create?
An enterprise culture, promoting entrepreneurship, creating incentives for people to work will grow the potential output of the economy, reducing unemployment and inflation.
75
What does the Laffer curve show?
How total tax revenue changes, as tax rates increase from 0% to 100%.
76
What does it mean if the average tax rate is 0?
Tax revenue must be zero also.
77
What happens at a 100% tax rate?
All income must be collected by the government.
78
Why is this the outcome of a 100% tax rate?
There is no incentive to produce output.
79
How can supply side policy help the government achieve it's macroeconomic objectives?
They aim to set markets free, promote entrepreneurship, which should create economic growth.
80
What does a fall in the natural level of unemployment mean?
A rightward shift of the LRAS curve from LRAS 1 to LRAS 2.
81
What is the trickle down effect?
Supply side economists believe that expansionary fiscal policy leads to inflation of there's no increase in output as well.
82
What are the industrial supply side measures?
Privatisation, Deregulation, Internal markets, subsidising R and D spending.
83
What does privatisation involve?
The sale of assets from the public sector to the private sector.
84
What does deregulation involve?
The removal of regulations to promote competition, removing barriers to market entry.
85
What are internal markets?
A substitute for privatisation, within public sector services, where they can earn money based on how many pupils/patients they attract.
86
What does subsidising R and D spending involve?
Measures such as cutting corporation tax, giving business more financial resources.
87
What are the labour market supply side policies?
Lower income tax, reducing state welfare payments, reducing trade union power, more flexible pension agreements, more short term employment.
88
Why does lower income tax improve supply side policy?
Creates labour market incentives, tax thresholds allowances can be raised to remove the lowest paid from the tax net.
89
How does reducing welfare payments improve the economy?
Lower benefit levels create incentives to choose employment rather than welfare payments.
90
How does reducing trade union power improve productive potential?
Removing trade unions' legal protection, and extending freedoms for workers who don't belong to unions.
91
How do more flexible pension agreements improve productive potential?
Workers may be encouraged to opt out of state pensions, arranging private pensions, reducing burden on taxpayers.
92
How does more short term employment improve productive potential?
1 million people are now on zero hour contracts, where no work is guaranteed.
93
What are the examples of financial market supply side policy?
Deregulating financial markets, Encouraging saving, promoting entrepreneurship.
94
How does deregulating financial markets work?
Creates greater competition, among banks and building societies, increased supply of funds.
95
How does encouraging saving work?
Creates special tax privileges for saving, gave shareholders first preference in markets.
96
How does promoting entrepreneurship work?
Encouraged growth of popular capitalism, and enterprise culture. Company taxation was reduced.
97
What don't supply side policies solve in a recession?
Structural problems, such as the debt burden.
98
What is the other disadvantage of supply side policy?
They can take a long time to fully implement, or feel the full effects.

MacroEconomics (15 decks)

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