2.6.2: Fiscal Policy

Austerity

Where a government tries to improve the budget balance by cutting spending and/or raising taxes

Automatic stabilisers

How the tax and welfare system can help offset an expansion or contraction of the economy.

Bail out

The government takes a stake in a bank or some other agent to prevent it from failing

Fiscal multiplier

Total change in GDP caused by an initial change in government spending.

Fiscal policy

Changes in taxes or government spending to achieve macro and micro objectives

Fiscal stimulus

Tax cuts and state spending increases aimed at increasing aggregate demand.

Budget deficit

When the government budget balance is negative (G>T)

Budget surplus

When the government budget balance is positive (T>G)

National debt

Stock of government loans that have yet to be repaid

Fiscal transfers

Welfare payments to households especially those on low incomes

Benefits-in-kind

Free or subsidised services for households rather than cash transfers

Pigouvian tax

Tax on activities that generate negative externalities to make the polluter pay

Progressive tax

Tax where the percentage paid in tax rises with income

Tax incidence

The effect of a tax on the welfare of buyers, sellers, or both

Ad valorem tax

Indirect tax based on a percentage of the sales price of a good or service

Direct tax

Tax on income and wealth e.g. income tax or corporation tax

Regressive tax

Tax where the percentage paid in tax falls as income rises

Disposable income

Gross income less income tax and national insurance plus welfare benefits

Indirect taxes

Taxes on spending. E.g. duties on fuel, cigarettes and alcohol, Value Added Tax

Marginal rate of tax

The % rate of tax on the next £1 of income earned