6. Fiscal Policy

Question 1

What is fiscal policy

Answer 1

changes in gov’t spending,taxation and the level of gov’t borrowing to help achieve some of the micro and macro objectives of the gov’t
State sector spending

Question 2

Gov’t spending

Answer 2

spending on public services, infrastructure, welfare benefits,

Question 3

Taxation

Answer 3

indirect taxes (VAT), income tax, corporation tax

Question 4

Fiscal balance

Answer 4

Budget defecit (G >T), Budget surplus (T>G), Budget balance when G=T

Question 5

Current gov’t spending

Answer 5

on providing public services e.g.NHS salaries

Question 6

Capital gov’t spending

Answer 6

new public infrastructure e.g. new motorway

Question 7

UK spending 2023-24

Answer 7

Social protection £341 billion - transfer payments
Health £245 billio
Education £131 billion

Question 8

Significance of gov’t spending for the UK?

Answer 8

• is a key componenet of AD
• helps to stabalise demand in a recession
• has a regional economic impact
• important in providing public & merit goods
• Driver of long-run growth
• Can help achieve greater equality in society

Question 9

Sources of UK tax revenue in 2023-24

Answer 9

Income tax - £268 billion
VAT £187 billion
National insurance contribution - £172 billion

Question 10

Main reasons for taxation

Answer 10

revenue generation
redistribution of income and wealth
economic stabalisation
regulation & incentives
Public goods

Question 11

ADAM smiths Canons of Taxation

Answer 11

Fairness - benefit pay principle
Certaintiy and Convenience
Efficiency - hard to avoidE

Question 12

Equity

Answer 12

taxes should be fair and equitable, meaning individuals and businesses in similar scenarios pay the same tax

Question 13

Efficiency

Answer 13

it should minimises economic distortions and losses

Question 14

Economic neutrality

Answer 14

Taxes should not distort economic decision making

Question 15

Horizontal equity

Answer 15

Similar tax payers in similar circumstances should be treated equally

Question 16

Vertical equity

Answer 16

Ability to pay principle - those with more wealth should pay more

Question 17

Direct taxation

Answer 17

is levied on income,wealth and profit - no choice

Question 18

Indirect taxes

Answer 18

taxes on spending

Question 19

Tax base

Answer 19

the people who pay tax and for what items

Question 20

Tax burden (micro & macro)

Answer 20

micro - if a busienss is taxed it will pass this onto consumers
macro - total amount of taxes collected compared to GDP

Question 21

Income tax

Answer 21

personal allowance of £12,570. Progressive tax rates

Question 22

National insurance

Answer 22

a direct tax helped to fund, pensions and sick pay

Question 23

Vat

Answer 23

indirect tax on many G&S. 20%

Question 24

Corporation tax

Answer 24

Paid by business 25%

Question 25

Proportional tax

Answer 25

everybody pays the same level of tax

Question 26

What is the budget balance

Answer 26

Fiscal balance - total tax revenue - total expenditure Surplus - when the fiscal balance is positive Deficit - when the fiscal balance is negative

Question 27

Budget deficit and implications

Answer 27

when the gov't spend more than it collects the gov't will need to borrow money by issuing bonds which can increase their overall debt.

Question 28

Budget surplus

Answer 28

occurs when a gov't collects more money than it spends. Allows them to save and pay off any debt, invest in infrastructure, reduce taxes.

Question 29

National debt

Answer 29

the gov'ts stock of outstanding debt. in billions of pounds accumulated over time as countrys borrow.

Question 30

How is a budget deficit financed

Answer 30

issues bonds - to raise funds. They are sold to investors. International borrowing - gov'ts can also borrow from IMF or world bank Central bank financing

Question 31

Bond yields

Answer 31

represent the return an investor can expect to earn by investing in a gov't bond

Question 32

Coupon yield

Answer 32

fixed annual interest rate paid by the gov't

Question 33

Normal yield curve

Answer 33

it is upwards sloping which means long term bonds have higher yields that short term bonds

Question 34

Budget deficit impact on AD

Answer 34

increase in gov't spending - spends more than it earns lower taxes - a budget defecit may be a result of this which can increase their disposable income Multiplier effect

Question 35

Negative effects of Budget defecit on AD

Answer 35

increase borrowing Higher interest rates - reduces private sector borrowing doing the crowding effect leaving more capital to borrow for the gov't Expectations of higher taxes

Question 36

Automatic stabaliser

Answer 36

automatic fiscal changes as an economy moves through different stages of the business cycle e.g. an increase in state welfare benefits when the unemployment rate is rising.

Question 37

Expansionary fiscal policy

Answer 37

involves the gov't aiming to increase AD - through deliberately increasing real government spending and/or lowering taxes.

Question 38

Fiscal multilier

Answer 38

estimates the final change in real national income (GDP) that results from an initial change in environmental spending and/or revenue plans.

Question 39

Lafer curve

Answer 39

is a relationship between economic activity and the rate of taxation which suggest there might be an optimum tax rate which maximises total revenue.

Question 40

Fiscal policy and short run AS

Answer 40

changes in VAT affect the supply costs of businesses - a fall in VAT reduces costs and will cause SRAS to shift outwards. Changes in environmental taxes changes in import tariffs CHanges in gov't subsidies

Question 41

Fiscal Policy and LRAS

Answer 41

changes in marginal & average income tax costs can have significance effect on work incentives in the labour market state funding of R&D Change in corporation Tax and import tariffs Gov't spending on new infrastructure