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Chapter 3.5 - Fiscal Policy (Government Spending (Health - NHS, Education …
Chapter 3.5 - Fiscal Policy
Government Spending
Health - NHS
Education - 4-18
Defense - army, airforce
Social protection - system of social security benefits (Jobseekers allowance, child pension)
Law and order - police, courts, prison service
Debt interest - borrowed money - pay interest on outstanding loans
Government revenue
1
Value added tax(VAT)
- tax on a wide range of goods and services (20% on most goods 0% on foods)
Excise duties
- taxes on specific goods (normally discourages/are harmful)
Indirect tax
- tax on spending/tax on goods and services
Business rates(Local)
- tax on business properties
Council tax(Local)
- on value of properties
2
Tax
- compulsory payment to government
Direct tax
- tax on income or wealth
Income tax
- collected from individual's earnings/pensions/interest earnings
National Insurance Contributions
- collected from employers/employees earnings
Corporation tax
- tax on profits on companies
Others: Inheritance tax, capital gains tax
Government Budget
Balanced budget
- Tax revenue is equal to government spending (balanced)
Budget surplus
- When tax revenue is greater than government spending (good)
Budget
- shows revenue of an individual or an organisation
Budget deficit
- When government spending is greater than tax revenue (bad)
Government borrows difference
State of economy
Low growth/high unemployment
- budget deficit in fiscal policy - successful in achieving growth/employment without leading to more inflation/payment problems
High growth/low unemployment
- large budget deficit - when low unemployment - high growth - higher inflation
Fiscal policy
- The use of government spending and taxation to achieve the objectives of the government
Main purpose - to change income and consumption patterns.
-Economic growth -Equal distribution of income
-Low unemployment -Balance of payments
-Price stability
Budget Deficit
- usually used when economy is in recession (lack of growth, high unemployment)
Increase in Government Spending
-
education/health - income for others - incomes rise - people spend more - becomes income to firms - extra output produced -employ more workers to meet demand - workers have income to spend - growth increases unemployment decreases (other example in folder)
Reduction in taxes
Government reduces taxes - low income families receive benefits - spend extra income when benefits raised - extra spending becomes income for firms - rise in output and employment (other example in folder)
Budget Surplus
- usually used when economy is stable(high growth, low unemployment)
Decrease in government spending
Government reduces own spending - spend less on roads transport - reduces incomes in economy - incomes fall, consumers spend less, less income for firms in economy - firms react by producing less output/employ less - incomes fall - reverse effect economy on incomes, output/employment fall - demand falls, less pressure on prices, demand for incomes fall
Increase in taxes
Government increases taxes - reduce disposable income for tax payers - income tax increases less take home pay - lower disposable income - less demand - less output - incomes fall
Direct taxes and markets e.g income tax
Labour
:
Workers may not feel need to seek jobs with higher wages - large proportion of extra wages - goes to taxes - deterred from jobs w/ higher taxes
Firms
:
Corporation tax reduced - firms have more disposable income - used to expand - buy capital goods/raise demand in markets - employ labour (influencing labour markets)
OR
Corporation tax increased - firms may decide investment is not worth the risk - post-tax rewards are lower
Indirect taxes and markets
Fiscal policy and indirect taxes can affect particular markets in the economy in order to achieve economic objectives
Affect market tax is levied on - taxes rise - quantity demanded falls
Extent in quantity demanded when tax is in place DEPENDS on PED (price elasticity of demand)
Different products - consumption moves from higher to lower taxed items
VAT
- wide range goods/services (20%)
Excise
- harmful - create negative externalities - higher tax deters consumption
No tax
- on necessities
How government spending affects markets
Services
Labour markets - incomes increase
Construction companies - earn more
Private sector - supply capital
Specific industries
-Cheaper to produce
-Effect
Small businesses
-Encourages people to start businesses - jobs
Evaluating fiscal policy costs :
e.g Government uses budget deficit to increase economic growth
Income increases BUT
Extra income saved - slows growth
Spending on imported goods - money leaks out economy
If supply does not keep up with demand - inflation rises