Fiscal Policy

• What are the two instruments of fiscal policy?

  Government spending and taxation
• How does fiscal policy influence the economy?

  It influences aggregate demand within an economy
• What is a fiscal stimulus policy?

  Increasing government spending and reducing taxation
• What does contractionary fiscal policy involve?

  Reducing government spending and increasing taxation
• What is a budget deficit?

  When government spending exceeds tax revenue
• What is the accumulation of budget deficits over time called?

  National debt
• What was the interest payment on the UK national debt in 2014/15?

  £51 billion
• What is the consequence of government borrowing?

  Increases national debt and future debt interest
• How much did the UK government spend on debt interest repayments in 2019?

  £35 billion
• Why is debt interest damaging for aggregate demand?

  It does not increase government spending component
• How did UK growth in the 1990s-2000s relate to national debt?

  Fueled by large budget deficits and national debt
• What is the impact of austerity measures on economic growth?

  They slow down future economic growth
• What does increased borrowing lead to in terms of fiscal policy?

  Future austerity to pay off national debt
• What are the constraints on fiscal policy?

  Manifesto promises and contractual agreements
• Why is government expenditure often inflexible?

  Much of it is committed and cannot vary easily
• What is the crowding out effect in fiscal policy?

  Government borrowing reduces private sector loans
• How do government bonds affect private sector investment?

  They make banks less likely to lend to firms
• What happens to market interest rates when government borrowing increases?

  Market interest rates increase due to reduced loans
• What was the UK government's fiscal policy response to the 2008 crisis regarding VAT?

  VAT was lowered to 15% in December 2008
• What was the amount of government investment spending brought forward in 2008?

  £3 billion for infrastructure projects
• What was the purpose of the "car scrappage" scheme in 2009?

  To support the UK car industry with subsidies
• What was the estimated deficit in 2009-10?

  £175 billion (12.4% of GDP)
• What was the national debt above in 2009-10?

  Above 80% of GDP at its peak