Govt. Budgetary Position and Fiscal Policy

What is fiscal policy?

The use of government expenditure to influence the level and composition of aggregate demand.

What are the two types of government spending?

current and capital.

What is current govt. spending?

spending on th day to day operations and services. Includes recurring costs ( annual) for the public sector to remain functioning

e.g. salaries of teachers, supplies & materials used in govt. departments.

What is capital govt. spending?

Spending on long-term investments that create or enhance physical assets- aimed to increase productive capacity of an economy. It is a supply-side policy.

e.g. building roads, bridges etc.

What are the main areas of government spending?

Health, Social Protection, Defence, Education, Law and Order, Debt Interest, Housing, Transport, Environment.

Define supply side policy

Supply-side policies are government strategies aimed at increasing the productive capacity of the economy and improving the efficiency of markets.

The main goal is to shift the Long Run Aggregate Supply (LRAS) curve to the right, which leads to economic growth without causing inflation.

define a tax

A compulsory transfer from an individual, institution or group to a central or local government.

What is a direct tax?

A tax levied on income/ wealth of individuals or organisation. Paid directly to the govt. and the burden of tax cannot be shifted to another person.

What is an indirect tax

A tax levied on goods and services- collected by intermediaries (retailers).

Burden of tax can be shifted to another person.

What is income tax

Direct Tax levied on wages, salaries, interest, dividends

It is progressive with tax bands ( 0,20,40,45%)

What is national insurance tax?

direct tax paid by employees (deducted from wages) and employers. Funds social protection spending ( JSA & state pension etc.) W

What is corporation tax

Direct tax levied on LTD and PLC profits.

What is inheritance tax?

A tax on wealth transfer at a time of death.

What is capital gains tax?

A direct tax on profits when an asset is sold for more than it was bought for.

Name the 5 main direct taxes

Inheritance, Income, Capital gains, Corporation, National Insurance

What is VAT?

An indirect tax on goods and services. Regressive.

VAT is regressive because, while the rate is flat, it takes up a larger proportion of income from low earners than from high earners due to differences in spending patterns.

What is excise duty?

A tax on specific goods usually to deter consumption. Rate depends on type of good- e.g. different alcohol strength and size have different taxes on it.

What two taxes do not go to the central govt. but the local govts. instead?

Council tax and Business Rates

What is council tax?

Tax on the value of an occupiers’ home. Changes based on value of house.W

What are business rates?

Paid on value of property owned/ rented by businesses.

Is a tax an injection or withdrawal to the circular flow of income?

It is a withdrawal- causes aggregate demand to fall.

Define a progressive tax

A progressive tax is a tax system where the average tax rate rises as income rises, meaning those who earn more pay a larger proportion of their income in tax.

define a proportional tax

A proportional tax is a tax system where the average tax rate remains constant as income increases, meaning all income levels are taxed at the same percentage.

define a regressive tax

A regressive tax is a tax where the average tax rate falls as income rises, meaning lower-income individuals pay a larger percentage of their income in tax than higher-income individuals.

What is council tax and business rates used for?

pays for local authorities services; road maintenance, community investment, local waste disposal etc.

What 6 things should a ‘good tax’ be?

• certain- timing & amount clearly known to taxpayer

• convenient- means & timing should be convenient

• cheap to collect

• equitable- amount paid should be fair (based on ability to pay)

• efficient- should improve allocation of resources

  • harmonised- consistent or aligned with other countries

What is the ability to pay principle?

Those with higher incomes should pay more tax

what is the benefit principle

those who receive more govt. services should pay more

what might one consider when trying to make a tax equitable?

ability to pay principle, benefit principle.

what is another term for government spending?

public sector spending.