Define government budget
The government’s financial plans in terms of planned revenues and expenditure.
State and explain 3 conditions of government budget:
(i) Balanced budget
Government manages to balance revenues and spendings
(ii) Budget deficit
When government spends more than it collects from its revenue
(iii) Budget surplus
When the government revenue is more than its spent.
What are the 3 reasons for government spending?
fund essential serviced
to redistribute wealth
intervention to correct maket failure
What are the 3 reasons for taxation ?
Help redistribute income and wealth in the economy
Raise the cost of production to limit the production of demerit goods and services
Help protect domestic firms from overseas rivals (tariffs - tax imposed on imports)
Define tax burden:
Refers to the amount of tax that households and firms have to pay
Give 3 examples of direct tax :
Income tax
Corporation tax
Stamp duty
Give 2 examples of indirect tax :
Sales tax
Carbon tax
Define direct tax
Tax is paid from the income, wealth or profit of individuals and firms.
Define indirect tax
Expenditure taxes imposed on spending on goods and services.
What’s the formula to calculate GDP ?
Consumption + investment + government spendings + net exports = GDP
What is progressive tax ?
Those with a higher income or wealth levels are charged a higher rate of tax
What is regressive tax ?
Those with higher levels of income and wealthy pay a lower percentage of tax
What is proportional taxation ?
The percentage of tax paid stays the same irrespective of the taxpayer’s income.
What are the 6 principles of taxation? Copy
Equitable tax (fair)
Economical
Convenience
Certainty
efficiency
flexibility
Define fiscal policy
Use of taxes and government spending to affect macroeconomic objectives
What is the effect of fiscal policy on government macroeconomic aims?
Economic growth (boosting the economy’s potential output)
Low inflation (help prevent price levels from drastically increasing)
Low unemployment (subsidies create incentives for entrepreneurs)
Healthy Balance of payments (low rates of taxation helps keep domestic firms competitive)
Redistribution of income (helps redistribute income and wealth in the economy