Download 14.1_fiscal_policies_partA - econbus

Fiscal Policies
You all owe me
• Wolverhampton – unemployment…
• Past paper due next lesson…
Which EU
country is this?
Aims
• Understand the practical application of fiscal policy
• To be aware of the impact of budget deficits on aggregate
demand.
• An analyse the usefulness of fiscal policy as a short term and
long term tool for macro economic objectives
http://www.informationisbeautiful.net/visualizat
ions/the-billion-pound-o-gram/
Fiscal policies…
• Influencing the level of economic activity though manipulation
of government income and expenditure
• Associated with Keynesian Demand Management Policies
• Influence Aggregate Demand –
– Tax regime influences consumption (C) and investment (I)
– Government Spending (G)
• Influences key economic objectives
• Acts as an ‘automatic stabiliser’
What does this
mean?
UK Government Spending and Taxation
Measured as a percentage of national income
49
49
48
48
47
47
46
46
Government Spending
Per cent of GDP
45
45
44
44
43
43
42
42
41
41
Total Tax Revenue
40
40
39
39
38
38
37
37
36
36
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Total tax revenues as a share of GDP
Government spending as a share of GDP
Source: OECD World Economic Outlook
Budget
deficit and
budget
surplus…
can you
see
them?
UK Government Spending and Taxation
Measured as a percentage of national income
49
48
49
Deficit
48
47
47
46
46
Government Spending
45
Per cent of GDP
Surplus
45
44
44
43
43
42
42
41
41
Total Tax Revenue
40
40
39
Deficit
39
38
38
37
37
36
36
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Total tax revenues as a share of GDP
Government spending as a share of GDP
Source: OECD World Economic Outlook
Watch this
• Watch carefully and make a note of…
• The different types of tax mentioned
• How much the government forecast it’s debt to be
• Now much the UK debt is predicted to overshoot this
forecast…
How many
taxes can you
think of?
Taxation options
•
•
•
•
•
•
•
•
•
•
•
Corporation
Capital Gains Tax
Inheritance
Excise duties
Business rates
Council tax
Income tax
VAT
Betting Tax
Insurance premium tax
Royalties
•
•
•
•
•
•
•
•
•
Tariffs
Road tax
TV licence
Council tax
NI contributions
Congestion Charge
Stamp duty
Airport tax
Pigouvian tax –
environment
Tax revenue generated…
Why does the government
tax?
• Revenue
• To raise revenue to finance government spending (e.g. on public and
merit goods and services)
• Managing aggregate demand
• To help meet the government’s macroeconomic objectives such as stable
inflation and economic growth
• Changing the distribution of income and wealth
• A progressive system of taxation can help bring greater equality in income
& wealth between households
• The government may intervene directly through fiscal policy to on grounds
of equity
• Market failure and environmental targets
• Taxes can correct for externalities – a source of market failure
Government spending
Government spending
(G)
•
Government (or public) spending each years takes up over
40% of gross domestic product
•
Spending by the public sector can be broken down into
three main areas:
(1) Transfer Payments: i.e. welfare payments made to benefit
recipients such as the state pension and the Jobseeker’s Allowance
(2) Current Government Spending: i.e. spending on state-provided
goods & services such as education and health
(3) Capital Spending: i.e. infrastructural spending such as spending on
new roads, hospitals, motorways and prisons
Public Sector Spending
Why Have Government
Spending?
• Direct government (public sector) provision of
– Public Goods
– Merit Goods
• Provide welfare support for low income households / the
unemployed
• Government spending is also a means of redistributing
income within society e.g. to reduce the scale of relative
poverty
• Government spending can also be used as a tool to manage
aggregate demand (GDP) as part of macroeconomic policy
Budget Deficit or Surplus?
Any chance of a balanced budget?
The budget deficit / surplus
• The budget deficit measures how much the government
sector needs to borrow each year to finance its own
spending
• The national debt is the total amount of borrowing
undertaken by the government that has not yet been repaid
• A budget deficit arises when government expenditure
exceeds government revenue (G>T) and a positive PSNCR.
The budget deficit / surplus
• The budget deficit measures how much the government
sector needs to borrow each year to finance its own
spending
• The national debt is the total amount of borrowing
ever tothat
be has not yet been repaid
undertaken by theNever
government
Confused with
Current account deficit / surplus
BoP
• A budget deficit arises when government expenditure
exceeds government revenue (G>T) and a positive PSNCR.
PSNCR
• Public Sector Net
Cash Requirements:
• In 2011 – govt intends
to spend
• £704bn
£163bn
• It’s hoping to receive
£541bn
• What’s the PSNCR
for 2011?
UK Public Sector Net Borrowing
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
-40
-40
-50
-50
-60
-60
-70
-70
-80
-80
-90
-90
-100
-100
billions
GBP (billions)
Annual borrowing, £bn at current prices
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Reuters EcoWin
UK Government Net Debt
Government budget
balances
£ billion at current prices, monthly data
650
650
600
600
What’s the
difference between
current and real?
550
500
500
450
450
400
400
350
350
300
300
250
250
200
200
150
150
90 93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
billions
GBP (billions)
550
08
Source: Reuters EcoWin
Taxation and Aggregate
Demand
How can taxes have a big effect on
aggregate demand?
The fiscal policy
transmission mechanism
Expansionary
Fiscal Policy
Cut in personal
income tax
Boost to disposable
income
Adds to consumer
demand
Cut in indirect
taxes
Lower prices –
higher real
incomes
Adds to consumer
demand
Cut in
corporation tax
Higher “post tax”
profits for
businesses
Adds to business
capital spending
Rise in
government
spending
Direct boost to
aggregate demand
Possible multiplier
effects on national
income
Fiscal Policy &
automatic stabilisers!
Automatic Stabilisers…
•Boom
• Recession
• What happens to Tax
revenue?
• Increases
• What happens to Tax
revenue?
• Falls
• What happens to
transfer payments?
• Falls
• What happens to
transfer payments?
• Increases
Got to here!
• Which one of the following is an example of fiscal policy? A
decision by the government to
• A decrease the exchange rate.
• B raise the minimum wage.
• C increase its budget surplus.
• D reduce the rate of interest.
• A current account deficit on the UK’s balance of payments
means that generally
• A the total value of imports exceeds the total value of
exports.
• B government expenditure exceeds government revenue.
• C the value of imports of services is less than the value of
exports of services.
• D the volume of imports of goods and services exceeds the
volume of exports of goods
• and services.
• In the short run, an increase in the government’s budget
deficit is most likely to reduce
• A imports.
• B unemployment.
• C interest rates.
• D inflation.
•
•
•
•
•
Demand-pull inflation is most likely to be caused by
A total spending exceeding productive capacity.
B an increase in output.
C a rise in raw material prices.
D a rise in interest rates.
UK debt & deficit
• In the financial year
2009/10 the UK
recorded general
government net
borrowing of £159.8
billion, which was
equivalent to 11.4 per
cent of gross
domestic product
(GDP).
• At the end of March
2010 general
government debt was
£1000.4 billion,
equivalent to 71.3 per
cent of GDP.
UK debt & deficit
• The Maastricht
Treaty's
Excessive Deficit
Procedure sets
deficit and debt
reference levels
of 3 per cent and
60 per cent
respectively for all
EU countries.
The collapse in tax
revenues
• Tax revenues tend to fall during a recession
– More people unemployed – less money from income tax
– Squeeze on business profits – less revenue from corporation tax
– Decline in consumer spending – hits income from VAT and duties
– Drop in average house prices – affects revenue from stamp duty
– Possible rise in tax avoidance and tax evasion
– Cuts in bonuses and other payments e.g. overtime pay
• The latest figures for the government show a big drop in tax
receipts
• These reflect the slowdown in 2008 rather than the recession
• Prospect of much worse to come in 2009-2010
Main Sources of Revenue
Income Tax, VAT & Corporation Tax
175
175
150
150
125
125
100
100
75
billions
GBP (billions)
Current Prices, £ billion. Source: HM Treasury
75
Income tax
50
50
VAT
25
25
Corporation tax
0
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Reuters EcoWin
Should we be worried about a
reduction in tax take?
• No
– In a recession, tax revenues fall automatically – this is part of what is known
as the automatic stabilisers
– Some of the reduced tax revenue comes from decisions by the government to
cut taxes to boost the economy
– Some comes from lower oil/petrol prices
• Yes
– This is a sign of an economy heading into a very deep recession
– The drop in revenues is causing a huge rise in the budget deficit - public
sector net borrowing is now almost three times higher than at the same stage
last year
– The result will be an enormous deficit which will required either higher taxes in
the future or cut-backs in government spending
– Some of the tax cuts introduced have been ineffective in increasing AD
UK Government Borrowing
Borrowing as a percentage of GDP, data for 2009 is a forecast from the OECD
7.5
7.5
5.0
5.0
2.5
2.5
Government borrowing
Cyclically adjusted government borrowing
0.0
Per cent
0.0
-2.5
-2.5
-5.0
-5.0
-7.5
-7.5
-10.0
-10.0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Source: OECD World Economic Outlook
UK Government Net Debt
650
650
600
600
550
550
500
500
450
450
400
400
350
350
300
300
250
250
200
200
150
150
90 93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
billions
GBP (billions)
£ billion at current prices, monthly data
08
Source: Reuters EcoWin
General Government Spending in Real Terms
65.0
65.0
62.5
62.5
60.0
60.0
57.5
57.5
55.0
55.0
52.5
52.5
50.0
50.0
47.5
47.5
45.0
45.0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
billions
GBP (billions)
Current spending at constant 2003 prices, seasonally adjusted, £bn per quarter
08
Source: Reuters EcoWin
Video clip – putting UK economy into
perspective