4.5 Role of the state in the macroeconomy Flashcards
(35 cards)
What is national debt?
The sum/accumulation of budget deficits over time (money government owes to its creditors=bond owners)
What is a fiscal deficit?
When government spending is more than its income (tax receipts) in a financial year
What is capital expenditure?
Government spending on capital goods + public investment e.g infrastructure (building roads/rail)
What is current expenditure?
Public spending on the day-to-day running costs of public services e.g salaries of doctors, teachers
What are transfer payments?
Government spending which transfers income from one household to another e.g welfare benefits, pensions
EVAL for expenditure (capital, current, transfer payments)
- What is more important? (capital vs current vs transfer)
- What is easier to cut? (capital may be easier as it affects future investment, whereas current + transfer direct;y affect individuals in the short-run)
- Should capital be protected? (leads to long term/future improvements in productivity + AD e.g infrastructure e.g HS2)
How are capital expenditure and current expenditure financed?
- Current spending financed by taxation
- Capital spending financed by borrowing (long-term)
EVAL for fiscal policy
- Size of the multiplier: the greater the multiplier value, the greater impact fiscal policy will have on national income, (multiplier determined by = consumer confidence, saving habits, import reliance, tax levels)
- Time lag: gap for fiscal policy=2 years+, long/variable lag, forecasts of the economy may lack accuracy, based on 2-3 years time, some events unpredictable e.g COVID
- Combination of policies: government spending + tax affect other elements of the economy, fiscal policy can be combined with SSP (e.g infrastructure spending) or tackling market failure (e.g spending and tax to fix externalities)
What is a cyclical fiscal balance/deficit?
The size of the fiscal deficit is influenced by the state of the economy (e.g in a boom, tax receipts are high and spending on unemployment benefits are low)
What is a structural fiscal balance/deficit?
The budget deficit which is not related to the current state of the economy, the deficit will not disappear when the economy recovers (e.g ageing population, tax avoidance)
What is a progressive tax?
The % of income paid rises as your income rises e.g income tax
What is a regressive tax?
The % of income paid falls as your income rises e.g VAT
What is a proportional tax?
The % of tax paid is constant no matter your income
What does the Laffer curve suggest?
- There is an optimum tax rate which maximises total tax revenue
- Therefore high marginal rates can reduce tax revenues through disincentive effects (people disincentivised to earn more in order to pay lower rate) and tax avoidance
What are fiscal rules?
Rules designed by government to control fiscal policy and public spending
What is debt sustainability?
Whether the government’s national debt is sustainable over the long-term (capacity to manage debt burden without resorting to debt relief)
EVAL of debt sustainability
- Depends on the size of the debt (whether government is adding to it e.g budget deficits)
- Depends on the interest rate government must pay on its debt
- Depends on the rate of economic growth
Draw:
Laffer curve
Y-axis = government/tax revenue
X-axis = tax rate
Middle of the curve = T (optimal tax level)
3 factors affecting the size and composition of public expenditure
- Changing incomes: countries with low incomes have low tax revenue=low government expenditure, as incomes increase, citizens demand higher quantity/quality of government services
- Changing age distributions: lower birth rates create a growing ageing population, means that government spending on pensions + healthcare will increase
- Changing expectations: puts pressure on government to change substance/delivery mechanism of their services leading to increased spending
3 benefits of public expenditure as a proportion of GDP
- Improvements to supply-side of economy: due to expenditure on infrastructure, health, education
- Raises living standards e.g due to development of recreational services (parks, libraries etc)
- Drives innovation + economic growth: provides long-term funding for firms and investment in applied research
3 drawbacks of public expenditure as a proportion of GDP
- Crowding out: government will need to borrow funds from private sector, reduces private investment
- Inequality: if spending not spread evenly throughout different regions of the country
- Increase in tax: taxation levels may have to rise in order to pay for the expenditure
2 factors influencing the size of fiscal deficits
- Trade cycle: e.g during downturns, tax revenue decreases and government spending increases so deficit increases
- Interest rates: if interest on government debt increases, the amount paid on interest repayments increases which increases the deficit (7% of all UK gov spending is on interest repayments of loans)
2 factors influencing the size of national debts
- Persistent fiscal deficit: increases national debt overtime, size of debt only decreases when government is running a budget surplus
- Ageing population: government runs a structural deficit in order to fund pensions/care, leading to high debt
Impact of changes in tax on incentives to work + EVAL
- Higher tax discourages individuals to work (less likely to work longer hours, accept promotions, join the workforce)
- High income earners may move abroad + taxes on low income may lead to poverty trap
- HOWEVER, higher taxes may mean people work longer hours in order to maintain income, increasing incentive to work
