4.5 Flashcards
(24 cards)
Reasons for the changing size and composition of public expenditure
- Attitutes of countries eg USA has much lower state spending making up for significant differences in developing countries gov spending ( becasue of their economy type)
- Depends on incomes of countires eg high income = increased demand for gov services eg increased technology= increased demand for NHS to intorduce = increased spending compared to poor countries
> Low income countires spend less of real GDP becasue of tax avoidance, poor tax collection and small amount of wealth to tax - Global finacial crisis= increased gov spending due to welfare paymentd and some govs used taxpayer money to bail out banks
- Ageing populations eg Japan = increased spending on pensions in LR
Impact on high gov spending on productivity and growth
- Infrastructure= increased efficiency= increased productivity= increased growth
- Education= creates human capital needed for growth
- Healthcare= reduces number of days workers lose from serious illness
- Creates multiplier effect= increased growth
Impact on high gov spending on living standards
- Corrects market failure and provides public goods = increases accesability = increased SOL
- Decreases absolute poverty through benefits,education and healthcare
EVAL- principle agent problem - spend money on things people dont want , gov not experts in market= inefficient at providing goods= decreased SOL
Impact on high gov spending on tax levels
- High gov spending may = high tax levels to sustain it = may disincentivise people to work= decrease workforce= decreased productivity
EVAL- depends on country eg oil rich countires can sustain without taxes due to high revenue
Impact on high gov spending on equality
- Increased spending= increased equality as it redistributed and helps provide minimum standard of living for poorest as everyone has basic goods= fair start to life
Impact on high gov spending on crowding out
- To spend money above tax revenue, gov has to borrow, amount of money available to borrow doesnt increase = gov competes with private sector for finance= increased IR= discourage investing and people buying on credit as more expensive= decreases AD
EVAL- in times of high unemployment it may lead to crowding in as it encourages investment through multiplier. Free market argues investment is better and more efficient under private sector as gov can lead to corruption and wasteful resources
Types of expenditure
- Capital expenditure
- Current expenditure
- Transfer payments
Define capital expenditure, transfer payments and current gov expenditure
Capital expenditure- spending on investment goods eg new roads, schools, hospitals which are covered over a year
Transfer payments- gov payments to which there is no corresponding output eg money taken from one group to another- pensions
Current gov expenditure- spending which recurs, this is on goods and services which are consumed and last for a short period of time eg drugs for healthcare
> current gov expenditure = general gov final consumption + transfer payments + interest payments
Percentages of major gov expenditures
- Defence- 6%
- Education - 12%
- Pension- 20%
- Transport- 2%
- Healthcare- 8%
Define progressive,proportional and regressive tax
Progressive tax- where those who earn high incomes pay a higher margin rate of tax eg direct taxes like income tax- UK uses this system
Proportional tax- where proportion of income tax paid as tax remains the same as income of taxpayers changes = everyone pays the same eg russia 13%
Regressive- proportion of income payed as tax is higher for those on lower incomes eg indirect taxes impacts those on lower wages more as its a higher % of their income
Economic effect of changes in direct and indirect tax rates on Incentive to work
- Increased tax = discourage individuals from working, free market economists argue that supply of labour is relatively elastic and decreased taxes on income increase work as individuals work longer hours, accept promotion as income risses
- Increased tax = high earners move abroad to avoid and poor may lead to poverty trap
EVAL, no hard evidence increased tax decreases incentive to work as Nordic counties have high taxes but have similar growth to lower tax countries like UK, also some argue people have to work longer hours to maintain income= increased incentive to work
Economic effect of changes in direct and indirect tax rates on Tax revenue
- Laffer curve shows that a rise in tax doesnt increase tax revenue , as increased tax= decrease motivation = decreased output and increased incentive to do tax avoidance and evasion
Economic effect of changes in direct and indirect tax rates on Income distribution
- Progressive tax increases equality as more money taken away from top earners and redistributed to poor
- Regressive taxes decrease income inequality as those on low incomes are affected more
- Corporation tax- takes money from shareholders who tend to be well off and give them to gov to spend on poor
EVAL- system has to be supported with good benefits system as poor dont necessarily get money instantly
Economic effect of changes in direct and indirect tax rates on Real output and employment
- Increased tax = decreased disposable income= decreased spending= decreased AD/ retained profits for firms = decreased investment = decreased AD
EVAL- effect depends on trade cycle - SRAS- increased indirect taxes= increased COP= decreases SRAS
- LRAS- increased taxes = discourage ppl from working = decreased size of workforce = decreased LRAS as people may go overseas and some become inactive
Economic effect of changes in direct and indirect tax rates on Price level
- Increased indirect taxes = can cause cost push inflation
Economic effect of changes in direct and indirect tax rates on Trade balance
- Decreases income from taxes= spend less on imports= improve trade balance as imports are relatively income elastic in UK
- In LR , AD may fall = decreases competitiveness of UK goods = decreased exports as lack of AD decreases firm confidence
Economic effect of changes in direct and indirect tax rates on FDI
- Low taxes on profits and investments = increases incentive to invest due to higher return
EVAL- can lead to race to the bottom where countries decrease taxes to encourage investment = decreased gov revenue for countires= increases equality
Distinction between automatic stabilisers and discretionary fiscal policy
Disretionary fiscal policy- deliberate manipulation of gov expenditure and taxes to influence the economy eg expansionary and deflationary policy
Automatic stablisers- mechanisms which reduce the impact of change in the economy on national income eg gov spending and taxation
> Recession= increased benefits as more unemployed= benefits are stabiliser as reduces impact on AD preventing big change in economy
> Boom= increased taxes as more employed = decreased disposable incomes= decreased consumption and AD so demand doesnt grow too much and cause inflationary pressures
What is fiscal deficit and national debt
Fiscal deficit- gov expenditure is greater than tax revenue in a financial year
National debt- accumulation of all gov debt built up over many years, measured in % of real GDP
What is cyclical and structural deficit
Cyclical deficit- Temporary deficit which is related to the business cycle eg deficit occurring during recession when gov is trying to stimulate
Structural deficit- deficit due to an imbalance in revenue and expenditure of gov meaning it exists at every point in trade cycle
> If gov has this national debt will grow as they have to keep borrowing to finance
Factors influencing fiscal deficit
TUIPGN
- Trade cycle- recession= decreased taxes and increased spending = worsens deficit
- Unforseen costs eg natural disasters = increased spending to repair and support individualds and infrastructure= increased deficit
- Interest rates- if IR is high= higher repayments on gov borrowing= increased deficit
> EVAL- depends on credit rating of gov
- Privatisation= increased gov tax revenue from sale of asset = decreases deficit in SR
- Gov aims eg policy of austerity = decreased deficit but increased AD attempt will increase deficit
- Number of dependants in country= affect spending+tax rev = influence deficit
Factors influencing national debt
- If gov is constantly running a fiscal deficit = increased national debt over time
- Ageing population= gov has to run a structural deficit to cover pensions and care= increased national debt
The significance of fiscal deficit and national debt
- High borrowing levels = increased IR due to increased demand for money= increased price of money= crowding out effect
EVAL-govs may borrow overseas and depends on trade cycle eg recession = decreased investment anyway so no change in IR - Servicing debt= creates opportunity cost (IR payments)
EVAL- depends on IR and size of primary deficit compared to IR repayments. Gov could have borrowed in liquidity trap (when IR is low) = little opp cost - High fiscal deficit= inflation as if gov increases spending and there is no fall in private sector spending= increases AD = inflationary pressure. May lead to gova printing more money to repay debts= hyperinflation eg zimbabwe in 2008
- High level of debt= decreases credit rating of gov = riskier to lend = high IR
EVAL depends if country has defaulted on debts before
> UKs rating is AA Germany is AAA - Intergenerational inequality- people will benefit now but future may suffer as they have to pay the bill for todays expenditure
EVAL- value of debt falls due to inflation and because countries grow = debt easier to pay= limit impact on future - If govs borrow from abroad= difficult to get enough currency (foreign) to repay debt = can cause problems for consumers because there is not enough foreign currency = consumers may not be able to import
- Gov borrowing can benefit growth if spent for capital spending = improve supply side of economy = help reduce deficit in LR
Use of fiscal policy, monetary policy, exchange rate policy, supply-side policies and direct controls to reduce fiscal deficits and national debts
- Policy of austerity= attempt to decrease spending = increase tax revenue = decrease deficit
- Increase taxes ( contractionary fiscal policy) = increase gov revenue= decrease deficit and debt
> EVAL- limit LRAS and growth - Demand stimulus through increased spening= increases economic growth= increases tax revenue= budget surplus = decrease debt in LR
- Rely on automatic stabilisers= allows economy to grow to decrease national debt / fiscal
- Issue bonds to increase finance= helps avoid raising taxes in SR = no heavy impact on LRAS & AD= continue growing and pay off
>EVAL-have to pay IR - Default on loans
>EVAL- makes accessing credit in LR hard
