Note
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Demand side policies: Fiscal policy
Demand side policies refer to the set of government policies that are used to manipulate the level of AD (C+I+G+(X-M)) in an economy. Sometimes we need to increase AD, sometimes we need to decrease AD.
Fiscal policy is one type of demand side policy. Fiscal policy is set of government policies relating to government spending and taxation.
How does the government collect revenue?
Direct taxes: taxes imposed directly on income e.g. income tax, corporation tax.
Indirect taxes: taxes imposed on expenditure e.g. VAT, cigarette taxes, petroleum tax.
Sale of goods and services: from government owned firms e.g. TFL, NHS.
Sale of government owned assets, this is called privatisation e.g the government used to own Royal Mail, it then sold this company to private investors, earning revenue.
Borrowing
How does the government spend the revenue it collected?
Current expenditures: recurring spending on day to day items e.g. teacher’s salaries, interest on debt, office stationery.
Capital expenditures: one off spending on capital projects e.g. extension to sixth form centre, new railway line, new hospital.
Transfer payments: transfers of income between sectors of society with no exchange of goods/services e.g. benefits, state pensions.
The government budget:
Budget deficit: occurs when government spending is greater than government revenue (government debt rises)
Budget surplus: occurs when government spending is less than government revenue (government debt shrinks)
Balanced budget: Occurs when government spending equals government revenue (government debt remains constant)
Government debt:
A sustainable level of government debt is one of the macroeconomic objectives.
Uk government debt of £1018 billion =sustainable
Luxembourg government debt of £1081= unsustainable
This is because we need to contextualise how big the debt is for that specific country. We do this by expressing government debt as a percentage of that country’s GDP.
When a government debt rises over 100% of a country’s GDP, it starts to become unsustainable as soon as it might become difficult for the government to pay the interest.