3.5 - fiscal policy

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21 Terms

1

government spending [term]

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

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2

direct tax [term]

a tax on income or wealth

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3

government revenue [term]

the source of finance for government spending

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4

indirect tax [term]

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

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5

balanced government budget [term]

when tax revenue is equal to government spending

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6

budget deficit [term]

when government spending is greater than tax revenue

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7

budget surplus [term]

when tax revenue is greater than government spending

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8

fiscal policy [term]

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

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9

income and wealth redistribution [term]

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

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10

progressive tax [term]

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

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11

main areas of UK government spending

  • healthcare

  • wellfare

  • education

  • interest payments

  • defence

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12

main causes of UK government revenue

  • income tax

  • Value added tax

  • National insurance

  • Excise duties

  • Corporation tax

  • Business rates

  • Council tax

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13

example of two countries usually in a budged deficit

  • UK

  • USA

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14

example of a country running on a budget surplus

germany

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15

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

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16

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

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17

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%

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18

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

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19

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

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20

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

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21

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

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