F: Demand Side policies Flashcards
(38 cards)
according to the specification
What does fiscal policy involve?
The use of government spending, taxation and the budget balance?
Budget (fiscal) deficit
When government spendng exceeds tax revenue
Structural budget deficit
Budget deficit at full employment
Cyclical budget deficit
budget deficit in a recession
national debt
total STOCK of governemtn debts over time
Fiscal surplus
when government spending is less than tax revenue
Direct taxation vs Indirect taxation - what are they?
Direct taxes - WIP; wealth, income and profits
Indirect taxes- Expenditure
What are key aspects to consider with fiscal policy?
- Financing governement spending
- Changing the distribution of final income and wealth
- Providing a welfare state safety-net
- Managing the economic cycle
- Improving long-run competitiveness
- Tackling important market failures
How is government spending financed?
Collection of taxation and borrowing the shortfall (with a deficit)
Resource/Current Spending?
Spending on day-to-day items that are used up (e.g salaries of civil servants). Short-term expenditure made each year.
Capital spending ?
Spending on investment (e.g building new infrastructure). Long-term expenditure which does not have to be renewed each year
Examples of current spending
- Salaries of NHS employees
- Drugs used in healthcare
- Road maintenance budget
- Army logistics supplies
Examples of capital spending
- Construction of new motorways and bridges
- New equipment for NHS
- Flood defence schemes
- Extra defence equipment
Why is government spending significant?
- Can help to achieve greater equity in society
- Improves provision of merit and public goods
- Is a key component of Aggregate Demand
- Can have a regional economic impact
What are the 4 key areas of government spending?
- Public goods proviion
- Merit goods provision
- Debt servicing costs
- Welfare expenditure
How can we compare the two types of demand management?
Expansionary fiscal policy refers to either increases in G, reductions in T or both; AD shifts rightward
Contractionary fiscal policy refers to either decreases in G, increases in T or both; AD shifts leftward
What are some bad effects of expansionary fiscal policy?
- Demand pull inflation and current account deficit - trade offs
- Worsening on government finances
- Crowding out effect
- X-inefficiency
- Time lags
How can we begin to evaluate expansionary fiscal policy
- Size of the output gap
- Size of the multiplier (so thinking of MPC’s effect)
- Consumer/business confidence
- State of governement finances
- LR returns to the governement (tax revenue)
- Laffer curve ideas (cuts may incentivise, reduce evasion and avoidance)
- Role of automatic stabilisers
- Crowding out vs crowding in(accelerator effect to exploit profit potential)
- Classical view of self-correcting economy in a recession
Ricardian equivalence
This is the idea that** consumers anticipate the future** so if they receive a tax cut financed by government borrowing they anticipate future taxes will rise. Therefore, their lifetime income remains unchanged and so consumer spending remains unchanged.
Similarly, higher government spending, financed by borrowing, will imply lower spending in the future.
If this theory is true, it would mean a tax cut financed by higher borrowing would have no impact on increasing aggregate demand because consumers would save the tax cut to pay the future tax increases.
What’s X inefficiency?
X-inefficiency happens when a lack of effective competition in an industry means that average costs are higher than they would be if the market was more contestable. This leads to a loss of technical / productive efficiency. X Inefficiency occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary.
What determines whether a producer will be able to pass on the burden of an indirect tax?
The price elasticity of demand and supply
what are the current tax rates?
20%, 40% and 45%
How does progressive taxation help government to achieve their macroeconomic objectives?
Progressive taxation is when the marginal rate of tax rises as income rises so those on higher incomes pay a greater proportion of their income in tax compared with those on lower incomes. This is used as a method of reducing income inequality in order to achieve a more equitable distribution of income however high taxation changes behaviour of high earners and encourages tax avoidance (laffer)
Regressive taxes
taxes that increase in relative size on lower income earners (the rate of tax paid falls as income rises)
