Fiscal Policy

• What is government budget?

  Government's financial plans in terms of its planned revenues and expenditure
• What is a contradictory fiscal policy?

  Used to combat inflationary pressures by reducing the level of economic activity (reducing government spending and raising taxes)
• What is direct taxes?

  Government levies imposed on income, profit and wealth
• What is expansionary fiscal policy?

  Used to stimulate the economy by increasing government spending/lowering taxes
• What is fiscal policy?

  Use of taxes and government spending to affect macroeconomic objectives, including redistribution of income and wealth
• What is indirect taxes?

  Government levies imposed on expenditure (sales tax, custom duties)
• What is proportional taxation?

  A tax system that deducts the same proportion of tax at all levels of income
• What is progressive taxation?

  A tax system that deducts a larger proportion of tax as a person's income level rises
• What is regressive taxation?

  A tax system that deducts a smaller proportion of tax as a person's income rises
• What is tax?

  A government levy on income and expenditure used to fund government spending and affect the level of economic activity in a country
• Reasons for government spending:

  Essential services are provided by the public sector. Government must also redistribute income and wealth and intervene to correct market failures
• Reasons for taxation:

  • Redistribution of income and wealth
  • Windfall tax
  • Reduce production of demerit goods
  • Inheritance tax
  • Tariffs imposed to protect domestic firms
• Examples of direct tax:

  • Income tax
  • Corporate tax
  • Capital gains tax
  • Inheritance tax
  • Windfall tax
• Examples of indirect tax:

  • Carbon taxes
  • Goods and services tax
  • Airport tax
  • Valued-added tax
  • Excise duties
  • Custom duties
  • Stamp duty
• Examples of government tax:

  • Tariffs
  • Inheritance tax
  • Income tax
  • Sales taxes
  • Corporate tax
  • Capital gains tax
• Principles of taxation:

  • Equitable
  • Economical
  • Convenience
  • Certainty
  • Efficiency
  • Flexibility
• Impacts of taxation:

  • Tax avoidance and evasion
  • Prices and quantity
  • Economic growth
  • Inflation
  • Business location decisions
  • Social behavior
  • Distribution of wealth
• Effects of fiscal policy on government macroeconomic aims:

  • Economic growth - Boost investment in economy/output
  • Low inflation - Boost productive capacity, keeps price level low
  • Low unemployment - Create incentive to work
  • Healthy balance of payments - Low tax rates raise competition, improves international competitiveness
  • Redistribution of income