Fiscal

• What does fiscal policy involve?

  Government spending, taxation, and budget balance
• What are the functions of fiscal policy?

  Macroeconomic and microeconomic functions
• What are the main instruments of fiscal policy?

  • Government spending
  • Taxation
• How can governments stimulate the economy through fiscal policy?

  By changing spending and taxation levels
• What is the aim of fiscal policy?

  To stimulate economic growth and stabilize the economy
• What does the UK government primarily spend its budget on?

  Pensions and welfare benefits
• What is the largest source of tax revenue in the UK?

  Income tax
• What is expansionary fiscal policy?

  • Aims to increase aggregate demand (AD)
  • Involves increasing government spending or reducing taxes
  • May worsen the government budget deficit
• What is deflationary fiscal policy?

  • Aims to decrease aggregate demand (AD)
  • Involves cutting government spending or raising taxes
  • Improves the government budget deficit
• How can fiscal policy influence aggregate supply (AS)?

  By reducing taxes to encourage spending
• What is the effect of government spending on healthcare?

  Improves the quality of the labor force
• What is a budget deficit?

  When expenditure exceeds tax receipts
• What is a budget surplus?

  When tax receipts exceed expenditure
• How is government debt different from government deficit?

  Debt is accumulated deficits over time
• What are direct taxes?

  • Imposed on income
  • Paid directly to the government
  • Examples: income tax, corporation tax, NICs
• What are indirect taxes?

  • Imposed on expenditure on goods and services
  • Increase production costs for producers
  • Examples: VAT and fuel duty
• What is a proportional tax?

  • Fixed rate for all taxpayers
  • Also called a flat tax
  • Example: 20% income tax rate for all
• What is a progressive tax?

  • Average tax rate increases with income
  • Higher income households pay higher rates
  • Example: UK income tax structure
• What is a regressive tax?

  • Lower income households pay a higher proportion
  • Does not relate to income level
  • Example: London Congestion Charge
• What are the Canons of Taxation?

  1. Low cost of collection
  2. Obvious timing and quantity
  3. Convenient payment methods
  4. Based on ability to pay
  5. Minimum efficiency loss
  6. Compatibility with other tax systems
  7. Adjusts with inflation
• What are the limitations of fiscal policy?

  • Imperfect information may lead to inefficiency
  • Significant time lag for effects
  • Borrowing can crowd out private sector
  • High interest rates may limit effectiveness
  • Excessive spending can increase debt difficulties
• What is the difference between capital expenditure and current expenditure?

  • Current expenditure: recurring spending on goods/services
  • Capital expenditure: spending on long-lasting assets
  • Transfer payments: welfare payments without goods/services exchanged
• Why do governments levy taxes?

  • To fund public expenditure
  • To redistribute income
  • To stabilize the economy
• What is the significance of public expenditure as a proportion of GDP?

  • Affects productivity and growth
  • Influences crowding out
  • Impacts taxation levels and living standards
• What is crowding out?

  Reduction in private sector investment due to government borrowing
• How can high government debt affect taxation levels?

  May lead to increased taxes and austerity measures
• What is the relationship between budget balance and national debt?

  • Budget surplus reduces national debt
  • Budget deficit increases national debt
  • Balanced budget maintains national debt level
• What is a cyclical deficit?

  A temporary deficit related to the business cycle
• What is a structural deficit?

  A deficit existing at all points in the business cycle
• What are the consequences of budget deficits for macroeconomic performance?

  • Could be inflationary if it increases AD
  • May lead to crowding out of private sector
  • Can increase interest rates
• What is the significance of the national debt size?

  • Increases cost of borrowing
  • May lead to higher interest rates
  • Can result in higher taxes and austerity
• What is the role of the Office for Budget Responsibility (OBR)?

  • Analyzes UK finances
  • Produces 5-year economic forecasts
  • Assesses government performance against fiscal targets