4.2 Fiscal policy

Current revenue

Money collected by the government on a day to day basis

Capital revenue

Money collected by the government from activities that are non recurring

Current expenditure

Money spent by the government on a day to day basis

Capital expenditure

Money spent by the government on capital items that are not used up during that year

Transfer payments

Money spent by the government in exchange for which no factor of production is received

Budget deficit

When current government expenditure exceeds current government revenue

Budget surplus

When current government revenue exceeds current government expenditure

Balanced budget

When current government expenditure equals current government revenue

How the government can reduce a deficit

Increase taxes

Reduce public sector employment

Cut public sector wages

Advantages of a deficit

Improved public services

Increased spending on infrastructure

Higher employment - people employed to build infrastructure

Disadvantages of a deficit

Opportunity cost of repaying future debts

Increased burden on tax payers

Diminished international credit rating

National debt

The total amount of government debt that is outstanding

Implications of a large national debt

Future cost of repayment

Opportunity cost of interest

Borrowing for current spending - robbing peter to pay paul

How the government can decrease national debt

Debt write off

Negotiate lower interest rate

Ensure debt is self liquidating - e.g. using debt to build schools

Advantages of a surplus

Reduced inflationary pressure

Government will have a better ability to manage its finances - leads to confidence in the economy

Helps us adhere to EU guidelines around debt to GDP

Negatives of a surplus

Citizens may demand better state services

Public sector workers may use it as an opportunity to negotiate pay increase

Tax payers may feel they are paying too much for too little

Fiscal policy

The actions taken by the government that influence government revenue and expenditure

Expansionary fiscal policy

Decrease taxes and increase expenditure to prevent a recession

Contractionary fiscal policy

Increase taxes and decrease expenditure to fight inflation

NMTA / National Treasury Management Agency

They borrow money for the exchequer and manage the national debt

Limitations of fiscal policy in stabilising the business cycle

Timing

Inefficient government spending

High borrowing costs

EU controls monetary policy

Functions of taxation

Raise revenue for the running of the country

Re-Distribute wealth

Achieve social objectives

Act as an automatic stabiliser

Characterstics of a good tax system

Should not act as a disincentive to work

Should aid the redistribution of income

Evasion should be impossible

Taxes should have a stabilising influence

Cannons of taxation

Equity

Certainty

Convenience

Economy

Arguments for carbon tax

Government revenuet

Protect valuable enviornmental assets

Encourage green R&D

Help pay to offset our carbon footprint

Arguments against carbon tax

Inflationary pressure

Loss of competitiveness

Decrease in the standard of living

Regressive tax

Direct tax

A tax levied against the wealth or income of individuals or companies

Progressive tax

A tax which takes a higher proportion from higher income earners than it does from lower income earners

Indirect tax

Tax levied on transactions or spending. This tax is placed on goods and services and collected by a third party

Regressive tax

A tax which takes a higher proportion from low income earners than it does for high income earners

Advantages of direct tax

Related to your ability to pay

Government is relatively certain how much they will collect

Cost of collection is low

When income increases tax decrease - stabalisers

Disadvantages of direct tax

Discourages work effort

May cause wage increases and industrial disputes

Reduce savings and disposable income

Advantages of indirect tax

Low cost of collection - retailers collect it

Taxes are included in the price of the good/service

Does not discourage work

Government can change consumption patterns

Disadvantages of indirect tax

Ignores a person’s ability to pay

Inflationary

The government is not certain how much it will earn

Unemployment - firms go out of business due to higher prices of goods