2.2.4 Governemnt Expenidture Flashcards
(25 cards)
Progressive tax
A tax that takes a higher proportion of income as income rises e.g. income tax
Regressive tax
A tax that takes a higher proportion of income as income falls e.g. VAT, alcohol duty, fuel duty
Often indirect tax
Proportional tax
A tax that takes the same proportion of income regardless of the level of income
Purpose of taxation
Raise tax revenue to finance government spending
Manage demand in the economy to help meet macroeconomic objectives
Redistribute income and wealth
Address market failure and environmental targets
Fiscal policy
Taxation and spending measures that help guide the economy and support the government in achieving their objectives e.g. expansionary and contractionary influenced by the state of the economy
Involved the use of government spending, direct and indirect taxation and government borrowing or affect the level and growth of AD, output and jobs
Purpose of fiscal policy
Allows manipulation of the level of AD
Used to change spending on goods and services
Redistribution of income and wealth
Microeconomic interventions to correct market failures such as pollution
Respond to economic shocks (could be a result of systemic risk)
Discretionary fiscal policy
One-off policy changes for example to impact aggregate demand
E.g. the furlough scheme
Automatic stabilisers
Policies which offset fluctuations in the economy without the need for government intervention
Effectiveness of automatic stabilisers
Depends on if government allows stabilisers to operate fully- need to avoid fiscal austerity
Depends on how generous the welfare system is
Depends on marginal propensity to consume
Expansionary fiscal policy
Used during times of economic decline, involves spending more on transfer payments or reducing taxes and increases the size of the budget deficit
Contractionary fiscal policy
Used during periods of economic growth, involved decreasing expenditure on purchases and transfer payments or increasing tax rates hence reducing the size of the budget deficit
Fiscal policy
Any policy relating to government spending, tax or borrowing
Demand
Also affects LRAS (Long Run Aggregate Supply) as can increase long term supply capacity so can be called fiscal supply-side policy
E.g. Increased government spending on broadband infrastructure, raising national insurance contributions, reducing the rate of VAT
Monetary policy
Any policy relating to interest rates, the money supply and or managing the exchange rate
Central bank led
Demand
E.g. devaluing the exchange rate, raising the base of interest, increasing the money supply in the economy
Supply side policy
Any policy intending to increase the productive potential of the economy e.h. Shifts LRAS to the right
Free market vs intervention
E.g. Deregulation of transport industries, reducing amount of paperwork to set up a business, lowering the rate of corporation tax( also FP)
Public sector
the part of an economy that is controlled by the government, not profit driven
Types of government spending
-Transfer payments (social welfare- there is no consequential increase in total output or increase in productivity)
-Current spending (recurring spending on public services, day-to-day)
-Capital investment spending (state investment)
Examples of transfer payments
Job seekers allowance or tax credits (financial incentive for married couples, pay less tax as get money back from tax paid)
Examples of current spending
Current government spending on public services
- Salaries of NHS employees
-Drugs used in healthcare
-Road maintenance
-Army logistics supplies
Examples of capital spending
-New motorways and bridges (and train lines)
- New equipment for the NHS
- Flood defence schemes
-Defence equipment
Budget (fiscal) deficit
Government spending is greater than tax revenue
Cyclical fiscal deficit
The size of the deficit is influence by the state of the economy
- movements/ correlation with economic cycle
-in a boom there will be high tax receipts and low spending on unemployment (higher VAT and corporation tax), reducing the size of the cyclical deficit
Direct taxation
Taxes on income, profit and wealth paid directly by the bearer (e.g. income tax is paid directly by you to the government so you never receive that money)
Indirect taxation
Tax on expenditure levied onto goods and services and paid by the supplier e.g. VAT
National debt
The total amount owed by the government which has accumulated over the years
