fiscal policy

what is government revenue?

The amount of money the government receives.

what are the sources of government revenue?

direct taxes and indirect taxes

give examples of direct taxes?

- income tax

- national insurance contributions (NIC's)

- Corporation tax

give examples of indirect taxes?

- value added tax (VAT)

- exercise duties

what is government spending?

the total amount of money spent by the government in a given period of time

why does the government spend?

- to supply goods and services the private sector would fail to do

- to supply goods and services that would be too costly for many people

- to reduce poverty through welfare payments and benefits

- to support the economy when there is insufficient private sector investment

what are examples of the things the government spends on?

social protection, education, healthcare, defence, debt interest

what are local taxes?

Taxes in which the revenue goes to the local authorities. council tax and business rates

what is a balanced budget?

when revenue is equal to government spending

what is a budget surplus?

when the government revenue is greater than their spending

what is a budget deficit?

when the government spending is greater than their revenue

what does teh government often do once they enter a surplus?

the surplus is added to teh reserves or used to pay off debt

what does the government often do once they enter a deficit?

the government has to use reserves or borrow money or print money

what is the fiscal policy?

a policy that aims to control economy through use of government spending and revenue and taxation

how does a budget surplus affect macroeconomic objectives?

it will recued economic growth and inflation

how does budget deficit affect macroeconomic objectives?

will increase economic growth and employment

how can fiscal policy be used to increase economic growth?

- reduce taxation and increase spending

- this will mean people have higher disposable income and hence greater consumption

- lower taxes also mean more people incentivised to work increasing AS and hence economic growth

- increased spending on infrastructure creates jobs again increasing employment and AS

- lower taxes mans producers have increased profits allowing them to invest and make quality of products better which can increase exports

how can fiscal policy be used to increase employment?

- by reducing taxes and increasing spending

- more jobs by spending on infrastructure

- more incentive to work as higher disposable income

- producers will expand if corporation tax is lower and hence require more workers

how can fiscal policy be used to make prices more stable and lower inflation?

increasing taxation and lowering spending

- lower spending by government decreases AD allowing supply to keep up with AD and hence less demand pull inflation

- higher taxes decreases peoples disposable income which lowers AD and inflation

- however if taxes rise, costs for producers rise and hence can lead to cost push inflation

how can fiscal policy improve balance of payments?

- increased taxes and lower spending

- higher taxes mean less disposable income so less imports

- lower gov spending means unemployed have lower incomes meaning less imports

how can fiscal policy create fair distribution of income?

- increased taxes and increased spending

- higher taxes so rich lose income as well

- greater spending so poorer gain increased welfare and hence are better off in terms of financially and public services

what effect does a rise in income tax have on markets and economy?

- disposable income falls so workers may decide not to work resulting in decrease in supply of labour market, Also with lower incomes, demand falls for particularly non essential goods and services

- lower AD leads to less economic growth and hence unemployment but also lower inflation

what does a fall in corporation tax do to markets and economy?

- firms keep or gain more profit and hence invest leading to higher quality goods which can increase demand for products. Investment can lead to expansions and hence more workers may be needed increasing demand in labour market

- investments means greater economic growth as AD increases. Employment may also increase as more workers needed. Greater quality goods can lead to higher desired goods from international countries which can increase exports

how does government spending affect labour market?

- if spending on public services such as education, more workers would be required such as teachers

how does government spending affect construction market?

Governments are directly responsible for: roads, hospitals and schools. They can also encourage housebuilding by cutting interest rates

how does government spending affect private sector?

By building new schools there is more demand for computers, tables etc. so the profits of firms rise

what are the costs of fiscal policy?

-Consumers may save rather than spend their extra income so the economy does not grow as much as expected.

-Firms and consumers might spend the extra money on imports making the balance of payments worse.

-Inflation may rise if supply cannot keep up with demand in either the factor or product markets

- opportunity cost: If the government spends more on one area, e.g. education, then it will spend less on another area, e.g. healthcare. l If the government spends more it could pay for it by higher taxes. This means consumers have less income so they spend less meaning VAT receipts fall. l If a government cuts taxes then it must either spend less or accept a higher budget deficit.

what are the benefits of fiscal policy?

- higher economic growth

- lower unemployment

what are progressive taxes?

Taxes that take a greater percentage of tax the higher the income

what are the 4 consequences of a progressive tax systems with their evaluation?

- reduced inequalities of income

- tax evasion

- reduced incentives to seek promotions and employment

- people leave country

- lower employment as corporation tax is higher