4.3 - Fiscal Policy

Question 1

Government budget

Answer 1

A financial statement showing the forecasted government revenue and expenditure in the coming fiscal year

Question 2

Characteristics of government budget (3)

Answer 2

• lays out the amount the government expects to receive as revenue in taxes and other incomes
• how and where it will use this revenue to finance its various spending endeavours
• aimed to be balanced

Question 3

Balanced budget

Answer 3

government revenue = government expenditure

Question 4

Budget deficit

Answer 4

government revenue < government expenditure

Question 5

Budget surplus

Answer 5

government revenue > government expenditure

Question 6

Public debt

Answer 6

The cumulation total of past government borrowing which has to be repaid (including interest)

Question 7

Aggregate demand

Answer 7

A measurement of the total amount of demand for all finished goods and services produced in an economy (same formula as GDP)

Question 8

Public expenditure

Answer 8

Spending made by the government of a country on collective or individual needs and wants of public goods and public services

Question 9

Three reasons for public spending

Answer 9

1. Current expenditures
2. Capital expenditures
3. Transfer payments

Question 10

Current expenditures

Answer 10

Include daily payments required to run the government and the public sector (wages, salaries of public employees like teachers, military etc.) and **includes payments for public goods/services **(such as medicines for government run hospitals)

Question 11

Capital expenditures

Answer 11

Investments in infrastructure and capital equipment (e.g. new hospitals and schools, railways etc.)

Question 12

Transfer payments

Answer 12

Payments made by the government for which no goods or services are exchanges (e.g. unemployment benefits etc.)
- does not contribute to GDP as income is only transferred from one group to another

Question 13

Five reasons for taxation

Answer 13

1. Correct market failure
2. Earn government revenue
3. Promote equity
4. Support firms
5. Support poorer households

Question 14

How does taxation help correct market failure?

Answer 14

The government aims to subsidise merit goods & tax demerit goods to address market failure

Question 15

How does taxation help earn government revenue?

Answer 15

Revenue to fund the provision of essential services, public and merit goods is collected through taxation

Question 16

How does taxation help promote equity?

Answer 16

The wealthy are taxed to provide funds that can be utilised in reducing the opportunity gap between the rich & poor

Question 17

How does taxation help support firms?

Answer 17

In a global economy, governments choose to support key industries so as to help them remain competitive & taxation provides the funds to do this

Question 18

How does taxation help support poorer households?

Answer 18

Intervention seeks to redistribute income (tax the rich and give to the poor) so as to reduce the impact of poverty

Question 19

Direct taxes

Answer 19

Imposed on income and profits and are directly paid to the government by the individual or firm

Question 20

Examples of direct taxes (name 3)

Answer 20

• income tax
• corporation tax
• capital gains tax
• national insurance contributions
• inheritance tax

Question 21

Indirect tax

Answer 21

Imposed on spending: the less a consumer spends the less indirect tay they pay

Question 22

Examples of indirect taxes (name 2)

Answer 22

• VAT
• taxes on demerit goods
• excise duties on fuel

Question 23

Tax revenues to the government (name 3)

Answer 23

• Income tax
• Corporation tax
• Inheritance tax
• Sales tax
• Import tax

Question 24

Non-tax revenues to the government (name 3)

Answer 24

• Fines, tolls, fees etc.
• Forein aid (goods lent by another country)
• Loans from banks
• Donations
• Interest payments on loans
• Revenue from state-owned enterpises
• Rents
• Sale of assets (such as governmetn owned industries)

Question 25

Income tax

Answer 25

A tax levied directly on personal income

Question 26

Corporation tax

Answer 26

A tax levied on corporations' profits

Question 27

Inheritance tax

Answer 27

A tax levied on property and money acquired by gift or inheritance

Question 28

Sales tax

Answer 28

A tax on sales or on the receipts from sales (such as VAT)

Question 29

Import taxes

Answer 29

A tax collected on imports and some exports by a country's custom authorities

Question 30

Excise duties

Answer 30

Indirect inland tax imposed on certain unhealthy goods and services (e.g. alcohol, tobacco, gambking etc.)

Question 31

Customs duties

Answer 31

Indirect cross-border taxes on foreign imports

Question 32

Capital gains tax

Answer 32

A direct tax on earnings made from investments such as shares and private property

Question 33

Stamp duty

Answer 33

A progressive tax paid on the sale of commercial or residential property

Question 34

Carbon tax

Answer 34

A tax imposed on vehicle manufacturers or firms that produce excessive carbon emissions

Question 35

Windfall tax

Answer 35

Charged on indiciduals or firms that gain an unexpected one-off amount of money (e.g. lottery, company takeover)

Question 36

Progressive tax system

Answer 36

As income rises, a larger percentage of income is paid in tax

Question 37

Regressive taxation

Answer 37

As income rises, a smaller percentage of income is paid in tax - all indirect taxes are regressive

Question 38

Proportional taxation

Answer 38

As income rises, the same percentage of income is paid in tax

Question 39

Marginal tax rates

Answer 39

The amount of additional tax paid for every additional dollar earned as income

Question 40

The six principles of taxation

Answer 40

1. Simple: should know what, when, where and how to pay tax 2. Fair (equity): should reflect taxpayer's ability to pay 3. Convenient: system to collect should be easy and provide choice 4. Efficient: management by government should not be expensive or wasteful 5. Fit for purpose: no unintended side effect 6. Flexible: easy to adjust as required by changes in economy

Question 41

The seven impacts of taxation

Answer 41

1. Incentive to work 2. Government tax revenues 3. Income distribution 4. Economics growth 5. Trade balance (exports - imports) 6. Business location

Question 42

Fiscal policy

Answer 42

Fiscal policy is the use of taxation and government expenditure strategies to influence the level of economic activity and achieve macroeconomic aims

Question 43

Expansionary fiscal policy

Answer 43

includes reducing taxes or increasing government spending * used in order to generate further economic growth

Question 44

Contractionary fiscal policy

Answer 44

includes increasing taxes or decreasing government spending * in order to slow down economic growth or reduce inflation

Question 45

Discretionary income

Answer 45

Income that remains after taxes and necessity purchases are accounted for

Question 46

Strengths of fiscal policy (name 4)

Answer 46

* Spending can be trageted on specific industries * Short time lag (quick effect) * Redistribution of income through taxation * Reduces negative externalities * Increased consumption of merit/public goods * Short term government spending can lead to an increase in the total supply of an economy

Question 47

Weaknesses of fiscal policy

Answer 47

* Policies can fluctuate significantly when new governments are elected * Increased government spending can create budget deficits * Repaying this debt may lead to austerity on future generations * Conflicts between objectives * E.g. Cutting taxes to increase economic growth may cause inflation