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 are four policies does the government use to influence their objectives?

• Interest rates

• Money supply

• Government 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 three types of government expenditure?

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

• Current - running costs

• Transfer payments (e.g unemployment benefits)

What are four 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 three 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 two advantages of austerity?

• Reducing debt → keeps taxes lower in long run

• Shrinking state encourages private sector growth

What are two 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 three advantages of expansionary fiscal policy?

• Increased economic growth

• Decreased unemployment

• Decreased inequality

What are the four 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 three advantages of supply-side Policies?

• Increased economic growth

• Decreased unemployment

• Decreased inflation

What are the three disadvantages of supply-side policies?

• BoP worsens (because increased imports)

• Negative externalities

• Increased public debt