Fiscal Policy + Supply-Side Policies

What are the key indicators of Government economic performance?

• Economic growth

• Inflation

• Unemployment

• Current Account of the Balance of Payments

• Inequality

• Environmental Protection

• Fiscal Balance

What are the types of Poverty?

• Absolute poverty - household income cannot purchase minimum goods/services for survival (e.g $1-2 per day)

• Relative poverty - household income is below the median adjust household disposable income

What Policies does the Government use to influence their objectives?

• Interest Rates

• Money Supply

• Governemnt Spending

• Tax

• Supply-side Policies

• Trade Policies

• Exchange Rate Policies

• Regional Policies

What is Fiscal Policy?

• Use of Government Spending + Taxation

• Demand side policy

• Set out in the budget

What are the types of Government Expenditure?

• Capital - long term investment (e.g infrastructure)

• Current - running costs

• Transfer Payments (e.g unemployment benefits)

What are the reasons for Government Expenditure?

• Public good

• Merit good

• Social reasons (e.g reduce inequality)

• Control of the econmy

• Overseas spending

• Equity

• Efficiency

• Reduce unemployment

• Automatic stabiliser - automatically adjust based on income (e.g income tax + welfare benefits)

What does PSNCR / PSNB stand for?

Public Sector Net Cash Requirement / Public Sector Net Borrowing

What are the current targets for Fiscal Policy?

• Stability Rule - balance the current budget (day to day spending) → ensure the government is only borrowing for investment

• Debt Target - national debt must be falling as a share of GDP → ensure long run sustainability of finances

• Welfare Cap - limit on spending on welfare benefits

What needs to be managed by Fiscal Policy?

• Fiscal Surplus - tax revenue > gov spending

• Fiscal Deficit - tax revenue < gov spending

• National Debt - overall public sector borrowing

What is Austerity?

Government cutting spending

What are the advantages of Austerity?

• Reducing debt → keeps taxes lower in long run

• Shrinking state encourages private sector growth

What are the disadvantages of Austerity?

• Infrastructure investment would increase AD + LRAS

• Growth is needed to payback debt

What are the two types of Taxes?

• Direct - on an individual/organisation (e.g income tax)

• Indirect - on a good/service (e.g VAT)

What are three ways that a Tax can work on different incomes?

• Progressive - proportion of tax of income increases as income increases (e.g income tax)

• Regressive - proportion of tax of income decreases as income increases (e.g VAT)

• Proportional - proportion of tax of income stays the same as income increases

What is Expansionary + Deflationary Fiscal Policy?

• Expansionary - decrease taxation and/or increase gov spending

• Deflationary - increases taxation and/or decrease gov spending

What are the advantages of Expansionary Fiscal Policy?

• Increased Economic Growth

• Decreased Unemployment

• Decreased Inequality

What are the disadvantages of Expansionary Fiscal Policy?

• Increased Inflation

• BoP (X-M) worsens (because increased imports)

• Negative Externalities

• Crowding Out (decreased private sector becaused increased public sector)

What is the Laffer Curve?

1. As tax rate increases to T*, tax revenue increases

2. As tax rate increases pass T*, tax revenue decreases because people have less incentive to work

What is a Supply-Side Policy?

Actions by the gov to promote market forces (demand + supply) to increase economic growth

What are the two types of Supply-Side Policies?

• Market-Based - allows markets (prices mechanism) to work freely

• Interventionist - the gov intervenes to stimulate AS

What are two examples of Market-Based + Interventionist Supply-Side Policies?

Market-Based:

• Reducing tax

• Privatisation

Interventionist:

• Education + training

• Investment in infrastructure

What are the advantages of Supply-Side Policies?

• Increased Economic Growth

• Decreased Unemployment

• Decreased Inflation

What are the disadvantages of Supply-Side Policies?

• BoP worsenes (because increased imports)

• Negative Externalities

• Increased Public Debt