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Chapter 3.5 - Fiscal Policy (Key Definitions (Indirect Tax = A tax on…
Chapter 3.5 - Fiscal Policy
Key Definitions
Indirect Tax
= A tax on spending, often defined as a tax on goods and services
Balanced Government Budget
= When tax revenue is equal to government spending
Government Revenue
= The source of finance for government spending
Budge Surplus
= When tax revenue is greater than government spending
Direct Tax
= A tax on income or wealth
Budge Deficit
= When government spending is greater than tax revenue
Government Spending
= The total amount of money spent by the government in a given period of time
Fiscal Policy
= A policy that uses government spending and taxation to affect the economy as a whole
Progressive Tax
= A tax which takes a greater percentage of tax the higher the income
Income and Wealth Redistribution
= Government action, using mainly taxation and benefits, to reduce inequalities of income and wealth
Government Spending
Education - Paid for between 4-16 for majority of people
Social Protection - System of social security benefits
Heatlh
Debt Interest - Government had borrowed money which it needs to pay back
Law and Order
The government spends money on many things:
Achieving Economic Objectives Using Fiscal Policy
Low Unemployment
To achieve this the government uses a budge deficit. This means government spending is increased and taxation is reduced. This causes increased spending, output and employment.
Price Stability
To achieve this the government uses a budge surplus. This means government spending decreases and taxation increases. This causes reduced spending, so there is less pressure on the price level.
Economic Growth
To achieve this the government uses a budge deficit. This means government spending increases and taxation decreases leading to increased spending output and employment
A Healthier Balance of Payments
To achieve this, the government uses a budge surplus. This means the government spending decreases and taxation increases. This causes reduced spending, including spending on imports.
Government Revenue
Indirect Taxes
Value Added Tax
Excise Duties
Business Rates (Local)
Council Tax (Local)
Direct Taxes
Income Tax
National Insurance Contributions
Corporation Tax
Inheritance Tax
Capital Gains Tax
Tax
= A compulsory payment to the government
How Taxes Can Affect Markets
Direct Taxes and Markets
For example if its reduced, firms have more disposable income which they may use to expand
Maybe those firms will buy capital goods raising the demand in those markets
Corporation tax can also affect markets
For example workers may no seek jobs with a higher wage if a large portion of the extra wage goes into paying taxes
Furthermore they may employ more labour, influencing those labour markets
Direct Taxes can affect labour markets
Indirect Taxes and Markets
Government puts high tax on these items so the consumers pay towards the external costs those goods have
This is due to the fact these goods have negative externalities
Tobacco goods, alcohol and vehicle fuel is very highly taxes and excise duties are levied on them as well as VAT
VAT is levied on a wide range of goods, on most its standard rate is 20%
Taxes discriminate against the producers who products are taxed
Indirect taxes affect the markets of the products on which they are levied as they will increase the price of the product
How Government Spending Affects Markets
For example Government Builds more schools, hospitals, houses etc.
Construction Markets --> Construction Companies earn more
Private Sector --> Firms supply more furniture, computers
Labour Markets --> Nurses, Teachers income increases
Subsides to Specific Industries
Renewable Energy --> Makes it cheaper to produce --> Reduces use of fossil fuels
Support for small businesses --> Encourages people to start their own business --> Creates new jobs
Evaluating Fiscal Policy Costs and Benefits
If government uses budge deficit to increase economic growth, the income increases BUT:
Extra spending could be on import goods --> leaks money out of economy
If supply doesn't keep up with demand --> inflation rises
Extra income can be saved --> Slow down growth
There are always opportunity costs involved
Spending more on one area --> Reduces spending on another
Lower Taxes --> Lower Spending
Spending more in one area --> Increases Taxes (Consumers have less money)