13 - Fiscal Policy Flashcards
What is Fiscal policy?
The use of government spending and taxation to try and achieve government policy objectives.
What does it mean when G=T?
There is a balanced budget.
What does it mean when G>T?
A budget deficit.
What does it mean G<T?
Budget Surplus.
Why does a budget deficit occur?
When public sector spending exceeds revenue.
How can a budget deficit be eliminated?
By cutting public spending or raising taxation.
What is deficit financing?
Deliberately running a budget deficit then borrowing to finance the deficit.
What was fiscal policy used for from the 1950s to 1970s?
To manage the level of Aggregate demand, and deficit financing.
What is the aim of deficit financing?
To achieve full employment and stabilise the economic cycle.
How did Keynesian fiscal policy guide the Covid pandemic?
Large amounts of demand pumped into the economy from tax reductions and increased spending.
Which Keynesian policies influenced the use of fiscal policy?
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.
What did the government do in the 1990’s?
Increased government spending, raised taxes.
What happens when the economy gets nearer to normal capacity level of output?
A further increase in government spending or a tax cut inflates the price level.
What is supply side fiscal policy?
Creating incentives to work, save and invest. Government spending on retraining schemes.
What does supply side fiscal policy aim to do?
Increase the economy’s ability to produce and supply goods.
What did the financial crisis lead to in 2008?
The UK government bailed out banks, which led to the largest budget deficit in history.
What does successful fiscal policy lead to?
A shift in the LRAS curve rightwards.
What is the objective of collecting tax revenue?
To finance the provision of goods such as roads and schools which would either be under provided or not provided.
What are transfers?
Things such as the state pension and unemployment benefits. Redistributes income from taxpayers to recipients of these benefits.
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.
What was the distribution of government spending in 2022?
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%.
What was total government spending in 2021/22?
£1.05 Trillion.
Why is the amount of spending on the elderly increasing?
We have an ageing population.
What is the triple lock?
A guarantee that the state pension will rise by the highest measure of either wage increases, CPI inflation, or 2.5%.
What happens to the triple lock during Covid?
It was suspended, as workers came off the furlough scheme, so they were artificially high.
What factors are affecting the efficiency of the NHS?
Increased population, longer life expectancy, cost of new drugs.
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.
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.
What is demand led spending?
Spending such as unemployment benefits, which falls when unemployment falls.
What is debt interest?
Payments by the government to people who have lent to the state.
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%.
What is tax?
A compulsory levy made by a government to pay for its activities.
Why will the government have to find new sources of revenue?
People are moving away from fossil fuels, and living healthier lifestyles.
What is income tax?
The main direct tax, paid on earnings, pensions, benefits, savings and investment.
What is national insurance?
A supplementary form of income tax, which is used to fund public services.
What is corporation tax?
A tax on company profits.
What is VAT?
A tax on spending, paid at 20%, on most goods and services.
What are excise duties?
Another form of expenditure tax, levied on the quantity of a good, such as alcohol.
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.
