section 5

Question 1

what is fiscal policy

Answer 1

the manipulation of…
government spending
taxation
budget balance
… to achieve macro objectives

Question 2

who implements fiscal policy in the uk

Answer 2

the government, in particular the treasury and the chancellor of the exchequer

Question 3

what is ‘the budget’

Answer 3

when the chancellor announces changes in government tax, spending, and borrowing plans

Question 4

what does government expenditure mean

Answer 4

the spending by the government in the economy

Question 5

how much does the government spend in the uk economy

Answer 5

between 2023-2024 it was rougly £1200 billion

Question 6

pattern of government spending in uk from ww2-2008-now

Answer 6

in real terms spending has increased most years since ww2 period

but did fall slightly after the 2008 crisis before recovering

spending increased more than proportionally to deal with the covid 19 crisis

Question 7

why is government spending measured as a % of gdp

Answer 7

tells us how much is being spent relative to a countries overall economic activity
and make it easier to compare with other countries

Question 7

main areas of government spending

Answer 7

social protection
education
health
debt interest repayments

Question 8

social protection

Answer 8

includes ares like pensions, housing benefit, supporting people who are risk of exclusion from society (e.g. low income)
dominated by pensions, set to be even more dominating due to aging population`

Question 9

current spendings

Answer 9

day to day spending on providing public services

e.g. public sector wages

Question 10

capital spending

Answer 10

spending on new public infrastructure; increases the amoint of capital stock

Question 11

transfer payments

Answer 11

money provided to provide a welfare safety net with no increase in output

Question 12

tax

Answer 12

compulsory contributions to state revenue, levied by the government

Question 13

main types of taxes in the uk

Answer 13

income tax (tax on income)
national insurance (additional tax on income)
vat (tax on spending)
corporation tax (tax on business profits)

Question 14

other tax examples

Answer 14

excise duties (tax on spending for specific products like alcohol or tobacco)
council tax (tax on property)
inheritance tax (tax on inheritance)

Question 15

what taxes generate the most government revenue

Answer 15

income tax, national insurance and vat

Question 16

what is taxed more; income or wealth

Answer 16

income taxed > wealth taxed

Question 17

what makes a good tax according to adam smith

Answer 17

economical (simple and cheap to collect)
equitable (fair and based upon ability to pay)
convinient (payment and timing)
certain (understood and difficult to evade)
efficient (minimum disincentives)
flexible (responsive to economic conditions)

Question 18

direct taxes

Answer 18

tax levied on income

the tax must be paid by the person it is levied on, cannot be passed on

mostly affects ad

e..g income tax, corporation tax, council tax

Question 19

indirect tax

Answer 19

tax levied on spending

the firm has to pay the tax to the government, but the firm will try to pass on the tax to the consumer in forms of higher prices

mostly affects sras

e.g. vat, excise duties, customs duties

Question 20

what income bracket pays 20%

Answer 20

12,571 - 50,0270

Question 21

what income tax bracket pays 40%

Answer 21

50,271 - 125,140

Question 22

what income tax bracket pays 45%

Answer 22

125,141 and over

Question 23

average tax rate

Answer 23

refers to proportion of total income paid in tax

Question 24

average tax rate formula

Answer 24

average tax rate = (total tax paid / total income)

Question 25

marginal tax rate

Answer 25

the tax rate (%) paid on one additional unit of income

Question 26

marginal tax rate formula

Answer 26

marginal tax rate = (change in tax / change in income)

Question 27

progressive tax

Answer 27

as income rises, a greater proportion of income is paid in tax, the average and marginal tax rates rise

Question 28

proportional/flat tax

Answer 28

as income increases, the proportion of tax paid stays the same; the average and marginal rates of tax are constant

Question 29

regressive tax

Answer 29

as income rises, a smaller proportion of income is paid in tax (higher earners still pay a higher amount of tax, but a smaller proportion of their income); the average and marginal tax rates fall

Question 30

national insurance

Answer 30

additional tax on income both employers and employees pay NICs NICs are calculated weekly, but the brackets are roughly the same for employees (8 or 2% depending on weekly pay)

Question 31

vat

Answer 31

value added tax; a tax on spending any firm with sales over £85,000 has to charge vat vat is regressive, those with lower income spend a higher proportion of their income so are disproportionally affected

Question 32

corporation tax

Answer 32

tax on firms profits uk has pretty low corporation tax compared to other countries

Question 33

council tax

Answer 33

tax paid to local authorities based on the value of a property- the higher the value of the property, the higher the amount payable valuations are based on 1991 data regressive tax

Question 34

what taxes are progressive verus regressive in the uk

Answer 34

regressive - national insurance, indirect taxes, council tax progressive tax - income tax

Question 35

fiscal drag

Answer 35

when the tax bracket sare frozen, so more taxpayers are dragged into higher tax brackets as their wages increase hence more tax is paid

Question 36

how could. the goverment make tax system more progressive

Answer 36

lower the basic rate of tax increase the personal allowance threshold raise the higher and additional rates of income tax lower the thresholds for higher and additional rates reduce vat tax wealth equally/more than income

Question 37

fiscal budget balance

Answer 37

the difference between tax revenue and government spending in one year

Question 38

fiscal deficit

Answer 38

spending > tax has to be financed through borrowing the uk nearly always runs a fiscal deficit

Question 39

how many fiscal surpluses has the uk had since 1945

Answer 39

12 =

Question 40

how does the uk finance a deficit

Answer 40

borrowing through issuing bond

Question 41

bonds

Answer 41

tradable, interest paying IOUs or debt which have to be repaid on a set date the buyers recieve an annual rate of interest (called a coupon rate) mostly bought by non bank financial institutions like pension funds or insurance companies

Question 42

national debt

Answer 42

the total amount the government owes every year the fiscal deficit gets added to national debt uk owes £2.5trillion, nearly 1000% of gdp

Question 43

how much does the uk spend annually to finance the debt

Answer 43

borrowing has to be repaid with interest £120billion every year, 4.5% of gdp and 10% of all government spending

Question 44

how is fiscal policy used to influence the level of AD

Answer 44

expansionary (increase spending reduce tax) contractionary (lower spending increase tax) neutral (increase tax and spending or reverse)

Question 45

multiplier

Answer 45

a change in aggregate demand leads to a larger proportional change in income

Question 46

how can the multiplier be used to justify expansionary fiscal policy or to discredit austerity measures

Answer 46

the mutiplier effect means that an increase in net government spenidng will cause real output to increase by more than increase in net government spending- useful in a recession

Question 47

tax influence on supply side of the economy

Answer 47

reducing income tax, incentivieses labour market particpation and improves quality of labour reducing corporation tax incentivises investment and increase productive capacity

Question 48

how does government spending influence the supply side of the economy

Answer 48

reducing welfare payments incentivises labour market participation capital spending can increase productive capacity (e.g. physical capital through infrastructure or human capital through improved quality of labour)

Question 49

how do fiscal policies influence the microeconomy

Answer 49

taxes - indirect taxes can be used to reduce spending on demerit goods subsidies - can be used to increase spending on merit goods state provision - the provision of a good where there would be. a missing market, i.e. defence (public goods)

Question 50

examples of how fiscal policy can be used to influece pattern of spending

Answer 50

spending; spending on electric charging infrastructure to encourage the buying of electric cars taxes; higher taxes on fuel so people want electric cars over petrol

Question 51

how has direct and indirect tax changed in the uk in recent decade

Answer 51

move towards indirect tax over direct tax

Question 52

pros of direct taxation

Answer 52

equitable ; based on ability to pay certainty ; people know how much they will be taxes economical ; easy to collect

Question 53

cons of direct taxation

Answer 53

disincentive effects on running a business / getting a job over £12500 may cause a brain drain as people relocate to avoid taxes on higher paid jobs easier to avoid ; higher income earners can use tax advisors to minimise tax

Question 54

pros of indirect taxation

Answer 54

can be used to address market failure / the pattern of demand (e..g merit goods) choice ; people have a choice about whether or not to buy certain products harder to avoid ; the tax is automatically added to the price of products

Question 55

cons of indirect taxation

Answer 55

distributional effects ; regressive so increase inequality inflationary effects ; can contribute to cost push inflation unintended consequences ; black markets may develop in response (e.g. (imported) cigarettes)

Question 56

cyclical fiscal deficit

Answer 56

a deficit caused by a downturn in the economic cycle

Question 57

structural fiscal deficit

Answer 57

the part of the budget defiict not caused the economic cycle a structural deficit is present even when the economy is booming