Fiscal Policy

What is the fiscal policy

A policy that uses government spending and tax to affect the economy as a whole

What was the Uk goverment spending in 2023/24

£1.15 trillion

What is meant by a balanced government budget

If government spending is equal to government income

What is a surplus budget

If government spending is less than government income

What is the effect of a surplus budget

This could happen either because of higher government income or because of lower government expenditure.

If the government reduces its level of spending there is less income for firms. This reduction in demand means firms need fewer workers. This creates a downward spiral of lower incomes leading to lower output needed and further job losses.

If the government raises taxes like income tax, then people will have less money to spend on goods and services they want leading to a left shift of demand meaning less workers are needed to produce the reduced output. With lower incomes there is less upward pressure on prices from demand. If they raised taxes for firms then they would be less willing to supply at each price meaning a left shift of supply and less output.

This means a surplus budget reduces pressure on prices by reducing the risks of demand pull inflation and helps keep costs like wages low as lower demand means lower equilibrium wages. This means firms can become more competitive.

What is a budget deficit

When government spending is more than Goverment income

What is the effect of a budget deficit

This could happen either because of lower government income or because of higher government expenditure.

If the government spends more say on health or infrastructure projects, then that money becomes income for the firms that provide the goods and services. This can help to increase demand stimulating job growth and increasing output and therefore economic growth.

If the government lowers taxes like income tax, then people will have more money to spend on goods and services they want leading to a right shift of demand meaning more workers are needed to produce the additional output. If they lowered taxes for firms then they would be more willing to supply at each price meaning a right shift of supply and more output.

-This means a deficit budget promotes growth by stimulating demand and this additional demand helps to create jobs

What type of budget does the Uk normally run

A budget deficit

When was the Uks last year with a surplus budget

2000

What are the two types of taxes

Direct and indirect taxes

What are direct taxes and give some examples

Taxes on income of wealthy

E.g Income tax,coperation tax,inheritance tax

What are indirect taxes and give examples

Indirect taxes are taxes on spending

E.g VAT and Excise duties(Taxes on demerit goods)

What does the Uk goverment spend most of its budget

Social Protection(£361b)

Health(£221b)

Education(£112b)

When a goverment aims to expand the economy(expansionary fiscal policy)what budget does they aim for

A budget deficit

What is the multiplier effect

When an original change in incomes lead to a greater change in income

Explain the multiplier effect

1)Goverment increases spending and reduces taxes

2)More disposable income on consumers

3)Demand increases

4)Firms receive more income

5)Firms employ more labour to meet increased demand

6)More workers have jobs and spending power

7)Aggregate Demand increases

8)Output increases which means economy is growing

What are the benefits of expansionary fiscal policy

-Higher living standards

-Increase in employment

-Higehr wages

-Higher revenue for firms

-Higher aggregate demand

-Decrease in poverty

-Improved social wellbeing/welfare

When the goverment wishes to deflate the economy(contractionary fiscal policy) what type of budget would they aim for

A budget surplus

Explain the multiplier effect in reverse

1)Goverment decreases spending and increases taxes

2)Less disposable income

3)Demand decades

4)Firms reviver less income

5)Firms employ less people due to lower demand

6)Less workers have jobs and spending power decreases

7)Aggregate demand decreases

8)Output decreases which means economy deflates

What are the benefits of contractionary fiscal policy

Reducing in inflation and balance of payment deficit

What is the effect of increasing direct taxes on market

If income tax goes up then people may not feel like it is worth the effort to seek extra work or a promotion if the after tax reward is lower. If corporations tax is higher then firms may be discouraged from investing.

What are the effects of decreasing direct taxes on market

If income tax goes down then people may be more willing to seek extra work or a promotion if the after tax reward is higher. If corproations tax is lower then firms may be more inclined to invest

What are the effects of increasing indirect taxes

If VAT goes up then the price of goods and services that have VAT goes up and so demand will go down. Excise duties are used to make selected goods very expensive in the hope of discouraging their consumption.

What are the effects of decreasing indirect taxes

If VAT goes down then the price of goods and services that have VAT goes down and so demand will go up. When VAT is low consumers also have more money to spend.

What is the benefit of goverment spending on subsidies

This can help encourage growth in areas with positive benefits like renewable energy or encourage investment in deprived areas or provide support to help grow small businesses or exports.

What Theo of budget do we go for each goverment objective

Economic growth=Deficit as increasing spending,output and employment. This means more AD and therefore growth

Low unemployment=Deficit as increasing spending means more income for firms to employ people to meet increase AD

Price Stability=Surplus as less spending means less income so consumers can’t spend,deceasing AD so firms earn less income so firms are forced to lower prices decreasing inflation

Fair distribution of Income=Deficit

What are the benefits and costs of fiscal policy

1)Reducing income taxes-Lower income tax means more more people can work meaning less unemployment and higher standard of living

HOWEVER,people can earn more in less time and may instead choose to reduce the amount they work while still earning the same

2)Lower income taxes-Means more spending power and so higher demand which causes firms to hire more workers

HOWEVER,what if taxes are cut but people save more or spend on imports,worsening balance of payments and reducing benefits to the Uk economy.Especially if people are worried about state of economy

-More output-A budget deficit leads to a rise in total demand in economy,supply rises leading to more output and employment.

HOWVER, if supply is unable to rise to match demand then this causes demand pull inflation. Also what areas are the goverment spending in. Also businesses could spend on machinery not workers

Lower inflation-If goverment decides to go in a budget surplus that means they’ll be less output and consumers are more likely to save their money. Forcing firms to lower prices,reducing inflation

HOWEVER,Tax increase could lead to a push by workers and trade unions for wage incrases leading to labour market conflict. Also depends on the Magnitude-how much are taxes being cut by

-Multiplier effect takes time to kick in

-How far will the multiple affect go

Lowering prices-If goverment increases taxes to reduce pressure on prices,it could lead to individuals demanding higher pay to maintain standard of living. This could lead to cost push inflation If

Explain the link of Fiscal policy and opportunity cost

-There is always an opportunity cost with goverment spending

-If government wishes to raise spending in one area,they must either:

-Cut spending in another area

-Raise taxes to generate more income

-Or increase debt

If goverment wants to reduce income taxes they must either:

-Increase other taxes

-Reduce spending

-Increase debt

How can Progressive tax redistribute income

-Those on higher incomes are taxed at a higher rate. Some of the income from the taxes is transferred to lower income households through benefits such as universal credit and job seekers allowance

What are the consequences of progressive taxes

If income tax is high then it may discourage some people from seeking extra hours or promotions because the after tax reward is not enough. Some of the wealthiest people may move abroad and become non-domocile residents meaning they don't pay tax in the UK.

How can benefits help redistribute income

The provision of benefits seeks to ensure that everyone has enough to meet their basic needs by providing incomes to the unemployed, retired and long term ill. This is funded through the taxes of working people

What are the issues of using benefits to redistribute income

If benefits are viewed as generous then some people ay be discouraged from working because the reward for working is not enough more than benefits.This leads to reduction in aggregate wholly as people are reluctant to work

How does the National minimum and living wage help redistribute income

The national minimum and living wages set out the minimum amount that can be paid to employees for their labour. This helps to ensure low skilled workers can earn a decent wage.

What are the issues of national minimum and living wage

Increases to the minimum and living wage rates might lead to firms employing less staff.This is to lower cost and keep more of their profit.

How does a decrease in indirect taxes help to redistribute income

VAT is known as a regressive tax as it represents a higher proportion of income for low earners. Therefore by reducing VAT the benefit will be felt most by low income earners.

What is the issue of decreasing indirect taxes

A decrease in VAT means the government has less money to redistribute.

What are some other cost of redistribution of income

-People are more reluctant to apply for high paid jobs as difference in post-tax income may not be worth it

-May lead to brain drain-talented workers move abroad