Fiscal Policy Flashcards
(21 cards)
What is Public Spending?
spending by the government to influence AD
What is Current Spending?
government consumption G = spending on the say-today
costs of running public services e.g. wages of teachers, energy bills for
hospitals; directly affects AD; does not include transfer payments
What are Transfer Payments?
payment made or income received in which no goods or services are being paid for, such as a benefit payment or pension
What is Capital Spending?
Government investment in the economy’s infrastructure
e.g. building hospitals & housing, new roads/railways
What are some Disadvantages of Higher Public Spending?
• Resource crowding out
- when the economy is operating at full capacity and the growth of the public sector causes a shortage of resources in the private sector
• Financial crowding out
- expansion of the state sector financed by increased government
borrowing can cause an increase in
demand for loanable funds
• Government sector is not profit-motivated, so an increasing role for the state could reduce productivity growth and economic growth
• Rising national debt – successive budget deficits increase the size of the national debt which increases the debt servicing costs (debt interest) so less is available to spend on public services
• May mean higher taxes and/or more austerity required in future
• Restricts freedom of choice – ‘nanny state’ - anti-free market
philosophy that private sector allocated resources more efficiently
• Less government spending can ease demand-pull inflation pressures
What can Government Spending do for Inequality?
• Spending on welfare benefits can help reduce poverty and inequality; caps on welfare have the opposite effect
• Low-income households tend to benefit disproportionately from public spending on housing, healthcare and education
What are direct taxes?
A tax on income/wealth e.g. income tax, employee NICs, corporation tax, capital gains tax
What is an Indirect Tax?
A tax on spending e.g VAT, excise duties
What is a Progressive Tax?
A tax that takes a higher proportion of income from those on higher incomes
What is Proportional Tax?
A tax that takes the same proportion of income whatever the level of income
What is a Regressive Tax?
A tax that takes a lower proportion of income from those on higher incomes
What is the Laffer Curve?
The relationship between
tax rates and government revenue.
At very high tax rates, people are
disincentivised to work/save/invest,
there may be more tax
avoidance/evasion/ possible brain drain, so a cut in the tax rate (T1 to T2) could generate economic growth and increase tax revenue (R1 to R2)
What is the Tax Burden?
The total tax revenues (direct and indirect) as a percentage of GDP.
What are automatic stabilisers?
Automatic fiscal changes as the economy moves through stages of the business cycle
e.g. the fall in tax revenues during a
recession or an increase in state welfare benefits when unemployment is rising; help smooth the trade cycle
What is a Discretionary Fiscal Policy?
fiscal policy decisions determined by government macroeconomic priorities
What is Counter-Cyclical Fiscal Policy
Keynes argued fiscal policy should be expansionary in recession and contractionary in a boom.
What are Fiscal Rules?
restrictions on fiscal policy set by the government to constrain
its own decisions on spending and taxes
What is a Fiscal Deficit?
The annual amount the
government borrows to make up the gap between its income (mostly tax revenue) and its spending.
A net injection into the circular flow G>T; it is a flow
What is National Debt?
A stock of the total accumulation of budget deficits (government borrowing) that is still to be repaid
What is a Cyclical Fiscal Deficit?
Government borrowing related to the trade cycle – in a recession government spending rises and tax revenues fall; should go when economy returns to trend growth rate
What is a Structural Fiscal Deficit?
Government borrowing that remains when economy is at full capacity; tax and welfare reform may be needed
