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level: Fiscal Policy

Questions and Answers List

level questions: Fiscal Policy

QuestionAnswer
What does Fiscal Policy Involve?-This uses: -Government Spending [Public Expenditure] -Taxation. -Fiscal Policy used to Influence the Whole Economy [Macroeconomic] or Individuals [Microeconomics]
What is a Reflationary Fiscal Policy? [Expansionary or Loose Fiscal Policy]-This is when AD is Boosted [AD Shifts to the Right] -Done when Government Spending is Increased, or when Taxes is Lowered. A Budget Deficit will usually Occur as Spending > Revenue
What is a Deflationary Fiscal Policy? [Contractionary or Tight Fiscal Policy]-This is when AD is Reduced [AD Shifting to the Left] -Done when Government Spending tanks or when Taxation is Increased. This can lead to a Budget Surplus for the Government as Spending < Revenue
When would the 2 Types of Fiscal Policy be Deployed? -Why?-Loose Fiscal Policy will be deployed when a Recession is in Place, or as Negative Output Gap is Present. Economic Growth will Increase and Unemployment will Sink. But Inflation and the Current Account will Worsen -Tight Fiscal Policy will be used when a Boom or Positive Output Gap is Present. Economic Growth and Employment will tank but Inflation and the Current account will be Better off
What would a Neutral Fiscal Policy mean?-This is when Government Spending and Taxation does No Net Effect on AD
What are Automatic Stabilisers in terms of Fiscal Policy?-Government's Fiscal Policy may be Automatic to the Changes in the Economic Cycle. eg During a Recession, more Benefits will be dished out while less Taxation will be Received. This will Reduce the Problems a Recession causes, but this creates a Budget Deficit -The same happens with a Boom. Less dished on Benefits while More in Taxation
What are the Discretionary Policy in terms of Fiscal Policy?-This is Government purposely Changing their Spending and Taxation Levels. This can be due to Expenditure on Infrastructure or Services. -Or it may be due to the Economic Situation. A Recession may require the Government to Spend More and Cut Taxes to Encourage Economic Growth
What is a Structural Budget Position?-This is the Government's Long-term Fiscal Stance. This means it is there Budget Position through the Economic Cycle, taking Booms and Recessions into Account [Hopefully]
What is a Cyclical Budget Position?-This is the Governments Fiscal Stance in the Short Term. This changes where the Economy is in the Economic Cycle. -Automatic Stabilisers will create Surpluses during a Boom, and not during a Recession.
What happens if a Budget Deficit is Caused by a 1. Loose Cyclical Budget Position 2. Loose Structural Budget Position1. This is a Cyclical Budget Deficit, and should be Balanced out by the Budget Surplus made during Boom Times 2. This is a Structural Budget Deficit, and this will Add to the National Debt
What is the Government's Current and Capital Expenditure?-Current Expenditure is Repeated Spending on Things that are Used up Quickly -Capital Expenditure is Spending on Assets [Infrastructure] that will Last a Long Time
How should Taxes be Designed?-Taxes should be Cheap to Collect, Easy to Pay, Hard to Avoid, and not create Unintended Disincentives
What is Horizontal and Vertical Equity-HORIZONTOL is that People who have Similar Incomes and Ability to pay Tax pays the Same Amount of Tax -VERTICAL is that People with Higher Incomes and More Ability to pay tax should pay More than those on Lower Incomes and less of an Ability to Pay Tax
What 2 Types of Taxes do Governments use to get Revenue?-Direct Taxation - Income Tax -Indirect Taxation - VAT or Excise Duty
Why do Governments Tax, apart from Raising Revenue-Promote Equality in the Economy
What is Progressive Taxation?-This is when one's Taxes will Rise as Incomes Rise. -This aims to Redistribute Income and Lower Poverty. Gov uses Tax Revenue from the Rich and Spend on the Poor via Benefits or State Provision Goods -This Tax will Reach Vertical Equity
What is Regressive Taxation?-This is when one's Taxes Fall as Incomes Rise and this is used for Supply side Growth -Reducing the Taxes of the Rich, the Government hopes the Trickle-down Effect can Work. -This gives more Incentive to Work Harder, but creates Inequality
What does the Laffer Curve show?-The Curve shows how much Tax Revenue would be Raised as the Tax Rate changes. At 1 Point in the Tax Rate, there would be a Theoretic Maximum Tax Revenue -But usually as Taxes Increase, it will lead to a Decline in Tax Revenue because Less Incentive to Work
What is Proportional taxation? [Flat Tax] -Why is it Hard?-Where Everyone Pays the Same Proportion of Tax despite Income Levels. This Achieves Horizontal Equity -This is Difficult though. 25% Tax for example may be too High for those on Lower Incomes, and not raise Enough Revenue from those on High Incomes to Pay for all the Public Goods and Services the Government Provides
What are the Advantages and Disadvantages of a Flat Tax?-Supporters argue that it can Simplify the Tax System, therefore Reducing the Incentive to Evade and Avoid Payment and Increases the Incentive to Earn More -But this can bring Less Tax Overall and there is no Vertical Equity. It could be made Progressive if there was a Tax Free Allowance - Where no Tax is Paid until a Certain Income is Reached
What type of Tax is VAT?-VAT [Sales Tax] is a Proportional Tax - Fixed Percentage that doesn't care for Price or Income -But it may be seen as Regressive. % of Total Income that Rich Spends is Less than that of the Poor as the Rich can Afford to Save more of their Income
What type of Tax is Income Tax?-The UK has a Progressive Income Tax System -From 0-12.5K there is No Tax on Income -Low to Middle Income get Taxed at around 20% -High Income gets taxed 40% -Very High Income gets taxed 45% -But this may be Regressive as considering Direct and Indirect Taxes, the Lowest Earners pay a Higher Proportion of Income as Tax than Higher Incomes do
What factors affect the Size of the Government Expenditure?-Size and Structure of the Nation's Population. Ageing Population may need State Funded Health Care [Japan] -Political Beliefs. They may Care for Welfare, or Individualism -Economic Situation. During a Recession Governments may Intervene to Recover the Economy. However Large National Debt may require Austerity
How can the UK Government borrow money?-From UK Banks, creating Deposits that the UK Government can Spend -Borrow money from the Private Sector by selling Treasury Bills which the Government will Pay off over a Period of Time -Foreign Financial Markets
What is a Public Sector Net Borrowing [PSNB] and Public Sector Net Debt? [PSND]-PSNB is just a Budget Deficit -PSND is the national Debt
What Problems can Excessive Borrowing lead to?-Demand pull Inflation as there is more Money in the Economy compared to Output. -Inflation then occurs, which may mean Interest Rates gets put up. Higher % Rates will Discourage Investment and make Currencies go Up in Value, making Exports Less Price Competitive
Why can a Large and Long term National Debt?-If it gets too big, then Firms and Nations may stop Lending to the Government, restricting Growth -Future Taxpayers will have Large Interest Payments on Debt to pay. This is an Opportunity Cost as Future Governments may have to use Austerity thus Little Economic Growth -Inflation and % Rates rising from Excessive Borrowing. Public Sector may also be Gigantic, 'crowding out' Private Sector Spending. [Although if the Economy is Boosted, the Private Sector may Catch up - Firms will Invest more] -Large Debts aren't Attractive for FDI as there is Uncertainty
How does a 1. Cyclical Budget Deficit get fixed 2. Structural Budget Deficit get fixed1. This is done via Recessions and comes when the Automatic Stabilisers [Benefits Up, Tax Rev down] kick in. This will be Corrected when a Boom appears 2. Governments have to Raise Taxes and Reduce Public Expenditure - Austerity. This will Harm Economic Growth
How can Fiscal Rules help the UK Government?-Ensures the Government doesn't Continuously Borrow and Overspend to promote Growth and instead have Economic Stability -Influences Business and Consumer Confidence in Future Economic Stability.
What is the Office for Budget Responsibility Role?-Set up in 2010, it will: -Make Reports stating UK Public Spending, Taxing and Predictions -Assess the Performance of the Government to its Fiscal Targets -Using Long Term Projections to see how Sustainable the Spending and the Revenue is
Why are Budget Surpluses not good as well?-This can mean the Taxation is too High, or Governments aren't spending Enough on the Economy. This both Hinders Economic Growth -Lowering Taxes or more Spending can both Correct the Surplus
How can Governments use Fiscal Policy to Tackle Poverty?-Spending on Benefits: Universal Credit, Pensions and more helps Those who aren't able to Work, thus Reducing Poverty -Provide Goods and Services: Lowers the Costs for those in Poverty and allows Access to those Essentials. This can also Improve Human Capital -Progressive Taxation: Narrows the Gap between People's Disposable Income. Revenue raised can go into Benefits and Provision of Merit Goods / Public Goods -If Growth is Achieved, then more Jobs and Higher Incomes is Achieved