2.1.2 Government Policies

Fiscal policy

Manipulation of government spending and taxes in order to achieve macroeconomic objectives

Direct tax

A tax directly gained on income or profits, such as income tax or corporate tax, that is paid directly to the government.

Indirect tax

A tax that is imposed on goods and services, which can be passed on to the consumer, such as sales tax or value-added tax.

Why do governments impose taxes

To generate revenue for public services and infrastructure, manage economic stability, and redistribute wealth to address social inequalities.

Three main areas of government spending

• Capital expenditure

• Current expenditure

• Transfer payments

Capital expenditure

spending that impacts the long run growth of the economy (e.g. infrastructure, building hospitals etc)

Current expenditure

Day to day spending e.g. on wages for public sector staff, medicines for hospitals

Transfer payments

Government expenditures that provide financial assistance to individuals without requiring goods or services in return, such as unemployment benefits and social security.

Fiscal deficit

When government spending is higher than their tax revenue, causing a fiscal deficit or budget deficit - the accumulation of such being called ‘national debt’

Fiscal surplus

When tax revenues are greater than government spending

Fiscal debt impact

• National debt gets bigger, meaning the government has to spend more of its revenue on paying off the debt.

• Future generations may be burdened with the debt of ‘today’.

Fiscal surplus impact

• Likely to be positive

• If a government collects more revenue than it spends in a year, the surplus could be used in a number of ways. For example, it could be used to spend on the future provision of public services or used to lower taxes in the economy.

• Most governments would use it to pay off some of the national debt. This would reduce future interest payments and strengthen the nation’s finances