Fiscal and supply-side policies

Question 1

Fiscal policy

Answer 1

• Use of G/T to achieve policy objs
  –> Budget deficit = G>TR, injection, expansionary
  –> Budget deficit = G<TR, leakage, contractionary
• Demand side policy (↑/↓AD),
  –> Expansionary = ↑AD (↑G, ↓T)
  |–> Pros = ↑AD, ↑GDP, ↑emp, ↑Y, ↑bus I
  |–> Cons = demand pull inflation, ↓BoP, deplete resources
  –> Contractionary = ↓AD (↓G, ↑T)
  |–> Pros = deflationary, creative destruction, trade balance
  |–> Cons = ↑unemp, recession
• Supply side policy (↑LRAS via incentives)
  –> Interventionist = improve SS performance
  –> Incentivise work/ I/ entrepreneurship

Question 2

Govt spending

Answer 2

• Types
  –> Current spending (public sector op costs)
  –> Capital spending (improving cap prod)
  –> Transfer payments (welfare)
• Effect
  –> Govt spending = public services, infrastructure, subs, welfare
  –> Tax = (direct - incentive, C) (indirect, C)

Question 3

Taxation

Answer 3

• Direct (income/ wealth/ profit based)
  –> Progressive (↑Y,↓T), may disincentivise
  –> Proportional (constant)
  –> Regressive (↑Y,↓T)
• Indirect (spending based, passed on)
  –> Specific (amount)
  –> Ad Valorem (%)
• Functions
  –> Govt funding (tax, borrowing, QE)
  –> Effect econ activity
  –> Stabilise currency
  –> Alter Y distribution
• Principles
  –> Smith = equity, certainty, economy, convenience)
  –> Good tax = vertical equity, horizontal equity, enforceable, effective, efficient, understandable

Question 4

Budget balance/ND

Answer 4

• ND = past deficits + gilts + treasury bills
  –> ↑interest + inflation (trading)
• Budget deficit = ↑borrowing, ↑emp, ↑living stan, +ve multiplier, ↑debt interest, oppt cost, ↑tax
  –> Cyclical = change with econ cycle
  –> Structural = ageing pop, national threat, prosperity
• Budget surplus = ↓inflation, ↓ND, harmful deflation
• Automatic stabilisers = ↓volatility, recession (↓T,↑G), boom (↑T,↓G)

Question 5

Fiscal regulation

Answer 5

• Rule based (automatic stabilisers)
  –> Deficit rule (balance budget every 5 years)
  –> Debt rule (↓debt prop to GDP by 2015)
• OBR = independent, analyse financial sector

Question 6

Fiscal evaluation

Answer 6

• Keynesian (for)
  –> Counter cyclical policies (interventionist)
  –> ↑AD through ↓T, to ↑MPC in ↓Y
  –> Promote G (labour intensive projects)
  –> Govt borrowing self finances (depends on fiscal multiplier)
• Classical (against)
  –> Govt failure/time lags
  –> Market self corrects
  –> Cyclical instability
  –> Crowding out
  |–> Resources (nationalisation)
  |–> Finance (↑gilt interest = ↑bank rate = ↓private I)

Question 7

Supply side policies

Answer 7

• ↑AS/prod cap (LRAS) = ↑GDP
• Aims
  –> Human cap I incentive
  –> Labour/capital prod
  –> Labour mobility
  –> R&D/capital I
  –> Contestable innovation
  –> Enterprise
  –> Diversification
  –> Global comp
  –> Sustainable growth
  –> ↑living standards
• Ways to more AS
  –> Labour prod
  –> Training/innovation
  –> Capital I
• Interventionist = govt correct market failure
  –> Ways = education, training, infrastructure, R&D, subs, industrial/ regional policy
• Market based = ↓state role, self correct
  –> Ways = ↓G/T, privatisation, dereg, labour market reform, marketisation (expose to market forces)
• Evaluation
  –> Pros = ↓unemp, ↑GDP, ↓inflation, ↑BoP
  –> Cons = cost, time lags, -ve stakeholder impact, output gaps, need targeted SSP’s, no guaranteed success

Question 8

Govt supply side policies

Answer 8

• SS fiscal policy = ↓T to incentivise ↑prod/prod cap, ↓G to reduce crowding out
• Labour market measures = training, ↓TU power
• Tax reforms = ↓T burden (↑indirect)
• Welfare reforms = ↓welfare, incentivise work
• Industry/comp policy = priv, dereg, trade lib
• Fin measures (encourage commercial banking) = fin dereg, ↑S (interest), enterprise (bus loans, T relief, advice), ↓G/borrowing (↓crowding in/out)

Question 9

Supply side policy impact

Answer 9

• AD = LRAS not enough to ↑output (must ↑AD)
• Govt objs = ↑AD causes ↑inflation, ↑LRAS brings back down, internationally comp prices good for BoP
• Inflation = ↓barriers (↓CPI inflation)(LRAS=AD) = ↓inflation
• BoP = quality (↓M,↑X), global comp, I
• Labour/emp/cap prod = ↓T = ↑AD, ↑AS (↑prod)