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Topic 3 : Implementing Policy - Coggle Diagram
Topic 3 : Implementing Policy
Fiscal Policy (Demand AND supply-side)
Types of govt spending
Current spending- public services i.e maintaining public roads
Capital spending- infrastructure
Welfare spending- transfer payments
Taxes
Direct
Paid directly from individual to gov
income/corporation tax and also stamp duty
Indirect
Passed on to consumers via higher prices
Ad Valorem Tax
VAT
Tax applied as afixed percentage of a goods price
Specific tax
Tax as a fixed amount on a good
50p per litre of diesel
Proggressive: rich pay more than poor
Regressive: poor pay a higher % of their income than rich
Proportional- takes same proportion of an individuals income regardless of income (National Insurance Contirbutions)
Budget deficits
Cyclical v structural budget deficits
Structural is simpluy the difference between tax rev and gov spending
Cyclical= temporary and dependent on state of economy
National debt x budget balance
National debt = total amount that gov owns but Budget balance is the diff. b/ween tax rev and gov spending in a single fiscal yr
Consequences
Increased budget deficit may lead to increased borrowing and therefor demand pull inflation
Increased gov borrowing may signify a weak economy and thus a lower credit rating and lower investments
Expansionary Fiscal Policy
A reduction in taxes or an increase in gov spending affects (C+I+G+(X-M))
Reducing welfare payments -> more ppl working-> LRAS shifts out
Reducing pensions -> more ppl saving up for retirement -> less AD
Raising NMW
Reducing income/corporation tax
Limitations
Crowding out- when high levels of gov spending leads to a fall in public sector spending and investment
Resource crowding out occurs when the government asks the private sector for money in order to fund their fiscal stimulus packages and this leaves the sector w no money to spend on its own projects
Financial crowding out- gov increases interest rates on bonds-> more ppl buy them -> interest rates in economy increase -> less investments
Contractionary Fiscal Policy
Increased taxes or decreased gov spending affect C +I + G + X - M
See expansionary branch and do the opposite
Fiscal austerity = not great politically
Privatisation of idustry = outwards shift of LRAS as there is increased efficiency
De-regulating industries reduces costs for firms
Laffer Curve
Shows how increased taxes may not always equal increased tax rev
High tax rates incentivise avoidance, evasion and ppl may decide they are better off just not working
Monetary Policy
used to control money flow - done by BoE w interest rates and quantitative easing
Instruments
Interst rates
Low IR= less saving and lower mortgage repayments as well as more mortgages being taken out
Low IR makes it easier for firm to borrow so they can R&D or invest.
Increased consumer spending from low IR will also increase investments + accelerator effect
Low IR makes govt debt repayments lower and more bonds will b issued therefore leading to increased gov spending
Quantitative Easing (QE)
Used when IR can no longer b lowered
BoE makes more electronical money and uses this to buy gov and bank bonds. The banks will have more money so will lend more to firms and households, this increases demand and stimulates the economy. The gov will also have more funds to spend in the economy in the hopes of boosting it
Limitations
Banks may not follow the BoE's base rate
Banks may be risk averse so may reduce amount of loans given out
IR most effective at stimulating spending and investment when consumer confidence is high
Liquidity trap
This is when a change in the supply of money does not change interest rates. This means conventional monetary policy cant be used to influence consumtion and investment so QE is used instead.
Supply side Policy
Gov policies aimed at increasing the productive potential of the economy and shifting the supply curve.
Interventionist Supply Side Policies
Training and Education-> directly shifts LRAS and as G is part of AD it also shifts AD
Increased AD from T&E will decrease unemployment (labour is derived demand) as more workers needed to provide goods to meet surge in demand
Increased AD and LRAS gets rid of any inflationary effects of the policy
If firms are able to utilise EoS's then they will become more price competitive globally since their goods can be sold at lower prices
May improve the current account
Limitations
Timelag
T&E is relative to other countries
cet par
Market Based Supply Side Policies
Privatisation and Tax reduction
increased competition, efficiency and less x-inefficiency
Lower prices for consumers due to lower costs
Lower inflation rate
Reduces structural budget deficit
Increased tax rev MAYBE from newly privatised firms
Deregulation
Potential increase in productivity -> reduced consumer prices -> improved economic welfare
Policy conflicts
Economic growth v inflation
Economic growth may lead to increased imports and worse off current acc
Reduced budget deficit= less gov expedniture =less AD=less growth
Negative externalities from gowth
Phillips curve to illustrate decrease in unemployment= higher inflation
Green taxes are anti-competitive
Progressive taxes may lead to higher inflation
Expansionary fiscal policy may increase gov borrowing and cause higher interst rates and inflation
