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Economics > Government Finance > Flashcards

Government Finance Flashcards

1
Q

What are the sources of government income?

A

-Taxation from direct and indirect taxes
-Interest earned from loans to other nations/states, railways, student loans etc
-Income from public sector corporations e.g local authority housing

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1
Q

What are the two types of taxation?

A

Indirect and Direct

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2
Q

What is direct taxation?

A

The individual pays these taxes straight to the tax authorities. It is a tax on income and wealth. For example, income tax and inheritance tax.

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3
Q

What is indirect taxation?

A

These taxes re paid through an intermediary to the tax authorities. It is a tax on spending. Usually regressive. For example, VAT and fuel duty.

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4
Q

What is progressive taxation?

A

Those on higher incomes pay proportionately more in tax than those on low incomes.

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5
Q

What is regressive taxation?

A

Those on lower incomes pay proportionately more than those on high incomes.

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6
Q

What is an example of progressive taxation?

A

If you earn £100,000 and pay £30,000 tax per year. You pay 30% of your income in tax. However, if you earn £20,000 per year you may pay £2,000 tax, which is 10% of your income.

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7
Q

What is an example of regressive taxation?

A

If you earn £100,000 and pay £30,000 tax per year. You pay 30% of your income in tax. However, if you pay £20,000 per year you may pay £8,000 tax, which is 40% of your income.

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8
Q

What is income tax?

A

This is a direct tax where a percentage of an individual’s income is deducted as revenue for the government. The tax rate a person pays is dependent on their income.

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9
Q

What is inheritance tax?

A

This is a direct tax that is levied on property and money acquired by girft or inheritance when they die.

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10
Q

What is corporation tax?

A

This is a direct tax that is a tax on profits and capital gains made by companies, calculated before dividends are paid.

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11
Q

What is national insurance?

A

This is a direct tax levied on employment income. It funds a range of benefits including pensions.

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12
Q

What is VAT?

A

This is an indirect tax. It is levied on purchases and spending. Some items are exempt from tax e.g. children’s clothes. The current rate is 20% although there are lower rates for certain items e.g. 5% on electricity.

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13
Q

What are excise duties?

A

This is an indirect tax on petrol, alcohol and tobacco. Used to discourage consumption.

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14
Q

What are the advantages of indirect taxation? (6)

A

-The government can use indirect tax to reduce demand for certain products e.g cigarettes
-They can be used to reduce negative externalities. This ensure the firm pays for the cost.
-They are less likely to affect the trade-off between work and leisure
-They are easier to levy than direct taxes e.g everyone pays the same
-They are less easy to avoid than direct taxes e.g individuals cannot hide their income
-They provide an incentive to save which enables greater investment.

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15
Q

What are the disadvantages of indirect taxation? (5)

A

-Indirect taxes are regressive
-Indirect taxes can cause cost-push inflation
-If taxes are too high, black marketeers will try to avoid them.
-Revenue from indirect taxes can be less certain due to cyclical demand.
-They prevent low income households from saving.

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16
Q

How can the government increase national income?

A

-Government reduce taxation
-All else being equal, leakages will fall. Therefore, injections will be greater than leakages.
-Households have more disposable income
-They will demand more goods and services
-Firms will expand output to meet this demand
-National income will increase

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17
Q

How can the government decrease national income?

A

-Government increase taxation
-All else being equal leakages will rise. Therefore leakages will be greater than injections
-Households have less disposable income
-They will demand less goods and services
-Firms will reduce output to meet this demand
-National income will decrease

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18
Q

What are the main areas of government spending?

A

Welfare payments, Job seekers Allowance, Rent benefits, healthcare, education and defence.

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19
Q

What are the three types of government spending?

A

Current expenditure, capital expenditure, transfer payments

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20
Q

What is capital expenditure?

A

This is money spent on long-term projects that will provide future benefits such as building new schools, new hospitals and new roads.

21
Q

What is current expenditure?

A

This is money spent on the day-to-day running of bodies like the NHS. For example, maintenance and wages

22
Q

What is transfer payments?

A

This is money the government gives to another without an exchange of goods and services. There is no productive output for this transaction. For example, Universal Credit and state pensions.

23
Q

Why would the government spend money on welfare payments?

A

-to ensure a minimum standard of living for those who need financial assistance.
-to provide an income for those who have retired

24
Q

Why would the government spend money on health?

A

-to provide free access to medical care for those who cannot afford private healthcare/so that healthcare is not under provided
-to live longer lives means people are able to work for longer
-to reduce the number of days lost through sickness absence which can decrease a firm’s productivity
-to reduce long term costs of chronic conditions such as heart disease/cancer
-to pay for COVID vaccination program/PPE/free lateral flow or PCR testing

25
Q

Why would the government spend money on education?

A

-to create an employable workforce
-to improve productivity/efficiency of the workforce
-to provide free schooling for those who cannot afford private education/so that education is not under provided

26
Q

Why would the government spend money on defence?

A

-to maintain secure UK borders
-to deter other countries from invading
-to comply with NATO obligations

27
Q

What are the reasons for taxation?

A

-To redistribute income from the rich to the poor
-To prevent the consumption of demerit goods
-To fund public and merit goods

28
Q

What are public goods?

A

Are goods or services that are made available to all members of society, provided free of charge through public taxation.

29
Q

What are the three characteristics of public goods?

A

-Non-excludable
-Non-rivalrous
-Non-rejectable

30
Q

Describe a public good? (non-excludable)

A

You cannot stop an individual from benefiting from defence or street lighting.

31
Q

Describe a public good? (non-rivalrous)

A

If one person consumes street lighting or visiting a national park, it does not prevent another from doing so.

32
Q

Describe a public good? (non-rejectable)

A

You cannot decide not to consume street lighting or defence.

33
Q

Why do firms choose not to provide public goods?

A

because they cannot make profit from them.

34
Q

What are merit goods?

A

Merit goods have a positive impact to society. They are goods which are considered to be socially desirable, and which are likely to be under-produced and under-consumed.

35
Q

What are some examples of merit goods?

A

Healthcare and Education

36
Q

Why does the government provide some free healthcare services?

A

Individuals benefit from the prevention of disease and firms benefit from a healthier workforce.

37
Q

Why does the government provide education?

A

Having an educated population means that the workforce will be more productive and this will benefit society as a whole.

38
Q

Look at the Public vs Merit goods table.

A

pg 6

39
Q

What does the government aim
to do?

A

Ensure greater equality of income.

40
Q

How does the government ensure greater equality of income?

A

They aim to provide welfare payments (transfer payments) to the poorest in society. They take this money from the richest and give it to the poorest in order to reduce income inequality.

41
Q

What is happening to government spending?

A

It is increasing.

42
Q

Why is government spending increasing?

A

-Changes in demographics-greater expenditure on healthcare due to an aging population.
-Government spending may increase as countries become wealthier.
-Spending will increase during periods of recession
-The UK will compare public spending to other EU countries and demand better public services
-Increased spending in 2020 due to covid-19 response.

43
Q

What is the budget?

A

It is an estimate of planned government revenue and expenditure for the coming year.

44
Q

What three types of budget does the government run?

A

Deficit Budget
Balanced Budget
Surplus Budget

45
Q

What is a deficit budget?

A

This is where government spending is greater than taxation revenue. This creates a deficit, which the government will fund through borrowing.

46
Q

What is a balanced budget?

A

This is where government spending is equal to taxation revenue.

47
Q

What is a surplus budget?

A

This is where government spending is less than taxation revenue.

48
Q

Why would the government run a budget with a deficit?

A

-The business cycle could be in the recession or slump phase. This means that the government will spend more on benefits and receive less tax revenue due to reduced employment and demand.

-Consumer confidence could fall meaning firms get less profit. Therefore, tax revenue will fall.
Increases in unemployment will mean the government spends more on benefits.

-The government could increase aggregate demand by spending more.

-If the interest rate on government borrowing were to rise then this would mean that the interest payments that the government has to pay to its creditors would rise.

-The ageing population means that the government will have to spend more money on pensions and healthcare relating to the elderly.

-The government might wish to increase spending on public services such as education. For example, free tuition fees for students.
Increased spending due to a crisis such as Covid-19

49
Q

Describe the circular flow of income?

A

-Households who are consumers give the factors of production (land, labour capital and enterprise) to firms who are producers.

In return, firms give the households factor incomes (wages, interest, rent and profit).

Firms use the factors of production to produce output of goods and services.

Households spend the income they receive for the factors of production on the firms’ output. This is called consumer expenditure (C).

50
Q

Be able to draw the circular flow of income.

A

Practice

Economics (8 decks)

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