Please enable JavaScript.
Coggle requires JavaScript to display documents.
ECONOMICS THEME 4 - TOPIC 4.5 - ROLE OF THE STATE IN THE MACROECONOMY -…
ECONOMICS THEME 4 - TOPIC 4.5 - ROLE OF THE STATE IN THE MACROECONOMY
4.5.1 - Public expenditure
Types of expenditure
Capital government expenditure
- big infrastructure developments e.g HS2 paid via borrowing
Current spending
- Day to day running of public sector e.g salaries
Transfer payments
e.g beneifts
Debt interest payments
Impacts
Improve productivity and growth
improve living standards and reduces absolute poverty
Government has to borrow from banks leaving less money for people and it will result in higher interest rates
High taxes but increased equality
4.5.2 - Taxation
Progressive tax is where those on higher incomes pay a higher marginal rate of tax e.g income tax
Regressive tax is where the proportion of income paid in tax falls as the income of the tax payer rises e.g VAT as it's a smaller proportion of the rich's earnings
Proportional tax is where the proportion of income paid on tax remains the same whilst the income of the taxpayer changes
Impacts of tax changes
Can discourage working as rich are taxed more on income tax
Increases tax revenue up until the point where people work less to pay less tax
A progressive tax system increases equality whereas regressive will increase inequality
Some influence AD and others influence AS
Indirect taxes e.g VAT cause cost push inflation
Will reduce imports and improve the trade balance in the short run
Low taxes on profit encourage businesses to invest in a country (FDI)
4.5.3 Public sector finances
Automatic stabilisers vs Discretionary fiscal policy
Automatic stabilising effect
uses welfare state, benefits and progressive taxes to calm down the economy in booms and busts
Discretionary fiscal policy
is the government deliberately changing the rate of taxes or benefits to affect AD and manage the economy