Taxation

Direct taxes

Taken directly from individuals & firms on their income & wealth. The burden falls on the person or firm responsible for paying it.

Indirect taxes

Expenditure taxes & taken from us when we buy a good or a service. Indirect taxes include VAT , Excise duty & Customs duty. This tax is normally a burden placed on producers.

Budget deficit

Occurs when the level of government spending exceeds the amount of revenue earned by the government in taxes.

Impact of Fiscal Policy on Economic Growth

• If an income tax fall means a rise in consumption, then AD will rise and so too then will EG

• If the fall in income tax means a rise in business profit & a rise in investment, then EG will also rise. Investment is a key driver of economic growth.

• If a highly skilled & educated workforce enter the country, then EG will also rise.

Impact of fiscal policy on Unemployment

• Lower income tax will mean a rise in C & I thus an increase in AD, so a fall in National Income and thus a decrease in unemployment.

• The lower income tax will positively affect foreign owned companies and encourage them to set up here and so employment levels may rise.

Impacts of Fiscal Policy on Inflation

This would be bad for inflation especially if the economy is in boom as it would increase YD & thus AD leading to a rise in demand pull inflation.