3.5 - fiscal policy

government spending \[term\]

the total amount of money spent by the government in a given period of time

direct tax \[term\]

a tax on income or wealth

government revenue \[term\]

the source of finance for government spending

indirect tax \[term\]

a tax on spending, often defined as a tax on goods and services

balanced government budget \[term\]

when tax revenue is equal to government spending

budget deficit \[term\]

when government spending is greater than tax revenue

budget surplus \[term\]

when tax revenue is greater than government spending

fiscal policy \[term\]

a policy that uses government spending and taxation to affect the economy as a whole

income and wealth redistribution \[term\]

government action, using mainly taxation and benefits, to reduce inequalities of income and wealth

progressive tax \[term\]

a tax which takes a greater percentage of tax the higher the income

main areas of UK government spending

* healthcare
* wellfare
* education
* interest payments
* defence

main causes of UK government revenue

* income tax 
* Value added tax 
* National insurance 
* Excise duties 
* Corporation tax 
* Business rates 
* Council tax 

example of two countries usually in a budged deficit

* UK
* USA

example of a country running on a budget surplus

germany

what is meant by fiscal policy

* By increasing the rate of tax it effectively lowers aggregate demand 
* Individuals will have less disposable income 
* Firms will have less profit 
* Taxation can impact on unemployment, inflation, and economic growth 


* Fiscal policy affects levels of income an expenditure within the economy 
* Government use the income from taxation for spending purposes 
* Pensions, health care, education, wellfare, infrastructure and defence are all paid for out of taxation 
* By increasing expenditure government can increase aggregate demand in the economy, and vice versa 
* When income is below expenditure the government will have to borrow 
* This leads to an increase in debt and therefore higher interest payments 

how can fiscal policy help achieve full employment

* By lowering taxation there is a greater incentive for individuals to work 
* In effect, the real wage rate will increase 
* Firms will see an increase in profits if corporation tax falls 
* This can be reinvested to create jobs 
* By increasing expenditure government create an increase in aggregate demand 
* This leads to more people working as firms demand more workers 

how can fiscal policy help ensure price stability

* Increased taxation reduces aggregate demand 
* This leads to a fall in demand pull inflation rates 
* It will also impact on the costs of a firm 
* Higher taxes increase costs 
* This will impact of supply as cost push inflation will occur 
* By raising or lowering taxation the government can help the economy to meet its inflation target of between 1 and 3% 

how can fiscal policy help achieve economic growth

* Reducing taxation gives firms a greater incentive to produce 
* It reduces the costs of firms 
* This leads to an increase in the supply of goods and services 
* An increase in spending will lead to higher aggregate demand 
* This will lead to increased output by firms 
* GDP will increase as a result 

how fiscal policy can help having a strong BOP

* a fall in taxation makes firms more competitive 
* This is due to lower costs 
* Firms have more funds to invest in production, leading to improvements and lower unit costs 
* Increased spending can be targeted to help firms increase output 
* Government can spend on education, training and infrastructure 
* All of these are vital if uk firms are to be competitive with other countries 
* This will lead to increased exports as we are producing goods and services that other countries want to buy 

how might direct taxes affect markets

* may affect labour markets
* workers may not think that seeking a job with higher wage is worth their while if income tax is high
* if corporation tax is reduced firms will have more disposable income
* they could use this to expand therefore increasing profits

how taxes ensure price stability

Increase taxes > people have less money > cant buy as much > reduces aggregate demand > reduces demand pull inflation > ensures price stability