Government Policies

• Fiscal Policy 


  Fiscal Policy is the use of Government Spending and Taxation to influence economic activity
• Expansionary Fiscal Policy 


  Is increasing government spending and/or decreasing taxes in order to increase economic activity. This aims to increase economic growth and reduce unemployment
• Contractionary Fiscal Policy


  Is decreasing government spending and/or increasing taxes
• Operating Balance 


  Is the difference between government income and spending
• Budget Surplus 


  When government income exceeds government spending

  Positive Operating Balance
• Budget Deficit


  When government spending exceeds government income (taxes)

  Negative Operating Balance
• If the government has a budget deficit ...

  It will have to borrow money in order to spend more than its income. This will increase government debt
• If the government has a budget or operating surplus...

  It can use the 'surplus' money to repay the government debt
• Public Finance Act


  The government must show responsible fiscal management:

  Reduce government debt to prudent levels

  Budget for a surplus on average until debt is returned to prudent levels

  Keep tax rates predictable and stable for future years
• Current Government spending


  On providing public services
• Capital spending


  New public infrastructure
• The policy objective of Fiscal Policy

  To increase economic growth. Increases in economic growth will also reduce unemployment
• To increase growth the government can either...

  Increase its spending or reduce taxes (expansionary fiscal policy)
• Expansionary Fiscal Policy either ...

  Increases Aggregate Supply or Aggregate Demand