Studied by 6 people
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
Note
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