31 - Fiscal policy

Policy instruments

tools governments use to implement their policies, such as interest rates, rates of taxation, levels of government spending

Fiscal policy

Decisions about gov spending, taxation, and levels of borrowing that affect aggregate demand in the economy

Budget

Gov's spending and revenue plans for the next year

Reasons to impose taxes

Pay public sector services

Discourage activities

Control aggregate demand

Fair wealth distribution

Direct taxes

Taxes levied on the income earned by firms and individuals (eg. social insurance tax)

Indirect taxes

Taxes levied on spending, such as VAT (eg. sales taxes)

Environment taxes

Protect environment (eg. landfill tax)

Gov expenditure

Amounts spent on different categories, like health care, education, defence... (budget)

Fiscal deficit

Amount by which gov spending exceeds gov revenue

Fiscal surplus

Amount by which gov revenue exceeds gov spending

Impacts of a fiscal deficit

National debt

Future generations burdened

Impacts of a fiscal surplus

Lower taxes

Pay off national debt (% of GDP)

National debt

Total amount of money owed by a country

Expansionary fiscal policy

Fiscal measures designed to stimulate demand in the economy

Contractionary fiscal policy

Fiscal measures designed to reduce demand in the economy

Fiscal policy on inflation

CFP reduces inflation

Fiscal policy on economic growth

EFP increases growth

Fiscal policy on unemployment

EFP reduces unemployment

fiscal policy and current account deficit

CFP reduces imports

Fiscal policy on environment

CFP reduces damage