Fiscal Policy and SSP

• Expansionary fiscal policy - a government approach, taxes or spending, to stimulate economic growth in an economy
• Contractionary fiscal policy - a government approach, taxes or spending, to reduce spending in an economy
• Automatic Stabilisers - Fiscal Policy tools to influence GDP and counter fluctuations in the economic cycle

  • Progressive Tax System
  • Welfare benefits
• Fiscal Drag - when an increase in consumer taxes leads to a decrease in consumption
• Discretionary Fiscal Policy - The use of expansionary fiscal policy aswell as automatic stabilisers
• Budget/ Fiscal deficit - When government borrowing exceeds tax revenue in a year
• Structural Budget Deficit - Budget deficit at full employment
• Cyclical Budget deficit - budget deficit in a recession
• National debt - total stock of government debt over time
• Keynsian's would argue budget deficit is important to revive economy from recession
• Pros of a Budget Deficit:

  • Higher growth/ lower employment
  • increase in quality of public sector
  • Redistribution of income
• Cons of a Budget Deficit:

  • deterioration of Government finances
  • Inflation conflict
  • Current Account deficit conflict
  • Reduction in confidence/ credit ratings on bonds
• Human capital flight (brain drain) - when economies experience net outward migration of skilled/ young workers
• Hypothecation - when tax revenue is saved to be used later for a specific purpose
• Marketisation - shifting the provision of goods/services from the non-market sector to the market sector
• Principle of Taxation (canon of taxation) - Criterion used to judge whether a tax is good or bad
• Privatisation - shifting the ownership of state-owned assets to the private sector
• Progressive Taxation - taxes when a larger proportion of income is paid as income rises
• Regressive Taxation - taxes where a smaller proportion of income is paid as income rises
• Reindustrialisation - growth in the manufacturing industry of an economy that has already industrialised
• Structural Budget Deficit - part of the budget that is unaffected by the economic cycle, and is more dependent on the decision of the government
• National debt - unpaid government debt
• Progressive Taxation - taxes when a larger proportion of income is paid as income rises

  • (<£12,000) - 0%
  • (£12,000 - £50,000) - 20%
  • (£50,000 - £150,000) - 40%
  • (£150,000+) - 45%
• Vat rate is 20% and is equivalent to 6.3% of UK GDP
• From April 2023, the corporation tax increased from 19% to 25% on profits over £250,000
• Proportional Taxes (Flat taxes) - where the marginal and average tax remains constant regardless of income, eg Romania have a income tax rate of 16% for everyone
• Types of Government Spending:

  • Capital Spending - assets for over a year
  • Current Spending - day to day expenditures
  • Welfare spending
• Objective of Fiscal Policy:

  • Stability & stimulation of AD
  • Redistribution of Income
  • Improving the economy's SSP
  • Correcting Market Failure
• Balanced Budget - when government expenditure = Tax revenue
• Budget Deficit - when government expenditure > Tax revenue
• Budget Surplus - when government expenditure < Tax revenue
• Cyclical Budget Deficit - part of the budget that tends to rise in economic busts and fall in economic booms
• Debt Stability - The ability to manage debt so that it doesn't impede growth or stability
• Debt Financing - Borrowing to finance a budget deficit
• Dumping - when a producer exports products at a lower price that the prices charged in their home country, or lower than the cost of production
• Fiscal Austerity - when the government enacts policies to reduce the size of a fiscal debt
• Fiscal Stimulus - Changes in taxation and government spending to boost demand and output
• Indirect Tax - Tax levied onto the person legally liable to pay someone else eg. sugar tax
• Direct Tax - Tax levied on income, wealth, profit eg. Income Tax
• Workshop of the World (UK) - during the 19th century, the UK was renounced this due to the industrial revolution