Fiscal Policy Themes (macro)

Question 1

What type of fiscal policy was used throughout covid in the UK?

Answer 1

expansionary

Question 2

What policies did the government introduce during COVID?

Answer 2

• Increase in government spending on Health care
• Wage subsidies
• Increased welfare spending
• VAT cuts
• Business rates exemptions

Question 3

Why did the government implement expansionary fiscal policy during COVID?

Answer 3

• Increase growth and close a national output gap
• Increase inflation to reduce risk of deflation
• To keep unemployment low

Question 4

What were the trade offs of using expansionary fiscal policy to counter impact of COVID?

Answer 4

• Demand pull inflation - more money going after the same amount of goods - more that 10% inflation rate
• Massive budget deficit
  borrowed 14.5% - £305bn in one fiscal year 2020-21
• National debt over 100% of GDP

Question 5

What type of fiscal policy is the UK government using currently?

Answer 5

Contractionary fiscal policy

Question 6

What 3 government policies are being used currently for contractionary fiscal policy?

Answer 6

1) Raising income tax (tax band freezes) - so as people earn more in line with inflation they will be dragged into higher income tax bands - increasing tax

2) Increased corporation tax 19% to 25%

3) Windfall taxes e.g. taxes on energy profits - to give energy price relief on households

Question 7

Give 4 points WHY is contractionary fiscal being used currently?

Answer 7

• To decrease high levels of inflation.
• To reduce the large budget deficit/national debt accumulated over COVID.
• increased confidence in government finances
• Flexibility for future EFP

Question 8

What are 3 RISKS of using contractionary fiscal policy CURRENTLY.

Answer 8

1) Risk of demand side shock - shocking economy into a recession

2) Worsen cost of living crisis - cuts to welfare and tax increases.

3) Increase in income inequality - due to frozen tax bands and tax rises.

Question 9

HOW is the government justifying and combating the RISKS of using a contractionary fiscal policy?

Answer 9

The government is balancing it with increased government spending on:

• Infrastructure
• Education
• Healthcare
• Skills/innovation

£600bn spending over next 5 years

Increase actual and potential