Studied by 0 people
Fiscal Policy
The use of taxation, public spending and the governments position to achieve the government’s policy objectives
Public sector borrowing
Borrowing by the government and other parts of the public sector to finance a budget deficit
Deficit financing
When the government runs a budget deficit, usually for several years, deliberately setting public spending at a higher level than tax revenues and other government revenues
Demand-side fiscal policy (Keynesian fiscal policy)
Increasing or decreasing the level of AD through changes in government spending, taxation and the budget balance
Expansionary fiscal policy
The use of taxation and government spending to reflate, or kick start economic growth in the economy and shift the AD curve to the right
Contractionary fiscal policy
The use of taxation and government spending to deflate the level of economic growth in the economy and shift AD to the left
Supply-side fiscal policy
Fiscal policy that act on the supply-side of the economy to increase the economy’s ability to produce and supply products
How fiscal policy can be used to influence AS
Government can reduce corporate and income tax to encourage spending and investment
Government can subsidise training or increase spending on education
Increase government spending on infrastructure
Spending on healthcare, improving the quality of labour
Reasons for taxation and government spending
Allows the government to reuse the revenue to finance spending
Taxes and subsidies can be used to alter the prices to change consumption patterns
To pay for public and merit goods that would be under-provided in the free market
To provide a basic system of welfare support
To redistribute income in society
To control AD as part of macroeconomic policy
Main categories of tax
Tax on income
Tax on spending/expenditure
Tax on capital and wealth
Fiscal stance
The government’s overall position in applying fiscal policy
Main objectives of the UK tax systems
Funding government spending
Managing the economy as a whole
Redistribution of income
Correcting market failure
Tax base
The number of tax-paying agents in the economy and the amount of income, wealth and spending on which taxes are applied
Discretionary fiscal policy
Changes in spending and taxation independent of the state of the economic cycle
Fiscal policy and the supply side
The productive capacity of the economy
The ability of the economy to produce a higher level of real GDP each year
Three systems of tax
Progressive taxes
Regressive taxes
Proportional taxes
Progressive taxes
The marginal rate of tax rises as income rises
Proportional taxes (Flat tax)
The marginal rate of tax is constant, regardless of income
Regressive taxes
The rate of taxes falls as income rises
6 principles of taxation
Economical
Equitable
Convenient for the tax payer
Certain
Efficient
Flexible
Hypothecation
When taxes are raised for a specific use
Two aims and objectives of public spending and taxation
Allocation
Distribution
Tax avoidance
When financial affairs are arranged to minimise tax liability within the law
Tax evasion
An illegal practice where a person, organisation or corporation intentionally avoids paying their true tax liabilyu
Excise duty
Inland taxes on the sale, production for sale, of specific goods within a country. These are different from custom duties
The Office for Budget Responsibility
An advisory public body providing independent economic assessment for government fiscal policy
Crowding out
An economic theory describing how increased government spending can lead to a decrease in private sector spending
The national debt
The total stock of central government debt at a particular point in time
Cyclical deficit
The part of the overall budget deficit that rises and falls with the upswings and downswings of the economic cycle
Structural deficit (Cyclically adjusted deficit)
The part of a county’s deficit that is not caused by changes in the economic cycle, it is due to an imbalance in the business cycles
Two fiscal rules
The deficit rule
The debt rule
