Fiscal Policy 3 Flashcards
What are discretionary fiscal changes
Deliberate changes in direct and indirect taxation and government spending
What are automatic stabilisers
Changes in tax revenues and government spending that come about automatically as an economy moves through the business cycle
What happens to tax revenues when the economy is expanding
Tax revenue increases which takes money out of the circular flow of income and spending
What happens to welfare spending during a growing economy
The government does not need to spend as much on means-tested welfare benefits such as income support and unemployment benefits
What happens to the budget balance and the circular flow during s fast growing economy
It tends to lead to a net outflow of money from the circular flow.
What happens when a government borrows
It issues debt in the form of bonds
Causes of a budget (fiscal) deficit
- recession causing rising unemployment
- decrease in consumer spending and profits leading to less tax revenue
- demographic factors
Economic justifications for budget deficits
It is normal for the government to have to borrow money.
What is an increase in national debt likely to cause
Higher taxes in the future - this will cut the disposable incomes of tax payers and reduce growth in the private sector
Arguments in favour of cutting government spending (fiscal austerity)
- encourages private sector growth
- high opp cost firm billions in debt interest
- cutting deficits increases investor confidence (FDI)
Arguments against cutting government spending (fiscal austerity)
- can lead to price deflation and lower unemployment
- government bond yields are low
- wrong to cut state spending when economy is in a liquidity trap
- economic growth is needed to pay back the debt and fiscal austerity makes this harder to achieve
What do Keynesian economists favour
The active use of fiscal policy as the main way of managing demand and economic activity
