Chapter 26 - Fiscal policy

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