4.5 Role of the State in the Macroeconomy Flashcards
(39 cards)
What is the difference between current government expenditure and capital government expenditure?
Current government expenditure is on goods and services consumed short-term, while capital government expenditure is spent on assets used multiple times
Examples of current expenditure include drugs for the health service, while capital expenditure could be on roads or schools.
What are transfer payments?
Welfare payments from the government aimed at providing a minimum standard of living for low-income individuals
Examples include Job Seeker’s Allowance, Income Support, child benefit, and the state pension.
What factors influence the changing size and composition of public expenditure?
Factors include:
* Economic growth
* Aging populations
* Government aims and views
* Global Financial Crisis
* Austerity measures
How does government spending affect productivity and growth?
Government spending on supply-side policies can improve human capital and boost long-run growth
Investment in education and training enhances productivity and competitiveness.
What is ‘crowding out’ in the context of government spending?
When government borrowing leaves fewer funds available for private sector investment, potentially increasing interest rates and discouraging private spending
In some cases, government spending can lead to ‘crowding in’ during high unemployment, encouraging private investment.
What is the definition of a proportional tax?
A tax with a fixed rate for all taxpayers, regardless of income
Also known as a flat tax.
What is a progressive tax?
A tax where the average rate increases as income increases, reducing inequality
An example is the UK income tax.
What is a regressive tax?
A tax where those on lower incomes pay a higher average rate than those on higher incomes
Examples include the London Congestion Charge and Council Taxes.
What does the Laffer curve illustrate?
The relationship between tax rates and tax revenue, showing that tax revenue increases until an optimum rate is reached, after which it declines
Point ‘T’ on the curve represents the optimum tax rate.
What is the difference between discretionary fiscal policy and automatic stabilisers?
Discretionary fiscal policy involves deliberate changes in government spending and taxes, while automatic stabilisers offset economic fluctuations without government intervention.
What is a fiscal deficit?
A situation where government expenditure exceeds tax receipts in a financial year.
Define national debt.
The total amount of money the government has borrowed at one time through issuing securities.
What is the distinction between structural and cyclical deficits?
Cyclical deficits are temporary and related to the business cycle, while structural deficits exist due to a long-term imbalance in revenue and expenditure.
What factors influence the size of fiscal deficits?
Factors include:
* The business cycle
* Interest payments on debt
* Privatisation
What measures can governments take to reduce fiscal deficits?
Measures include:
* Reducing government spending
* Increasing taxes
* Promoting economic growth
* Issuing bonds
What is the significance of fiscal deficits and national debts?
They can increase borrowing costs, lead to higher taxes, and potentially crowd out private sector investment.
What are supply-side policies?
Policies aimed at increasing productivity and economic growth by improving the supply side of the economy.
What are the economic effects of high taxes on incentives to work?
Higher marginal tax rates may discourage work, but some argue people may work longer hours to maintain income levels.
What is the impact of indirect taxes on the price level?
Indirect taxes can cause cost-push inflation by increasing the cost of goods, which is often passed onto consumers.
What is the role of government in reducing poverty and inequality?
The government can implement redistributive policies and welfare payments to support low-income individuals.
What has made accessing credit in the future difficult for countries like Russia and Argentina?
They have defaulted on their debts in the past.
Defaulting on debts can severely damage a country’s creditworthiness.
How did Sweden manage to balance their budget between 1994 and the late 1990s?
Through spending cuts and tax increases.
This approach is often used to stabilize government finances.
What was the debt reduction achieved by Saudi Arabia between 2003 and 2010?
From 80% of GDP to 10.2% of GDP.
This was primarily due to the sale of oil.
What is one method of income redistribution mentioned in the text?
Inheritance tax.
This tax prevents rich families from keeping all their wealth.
