Download Macroeconomic Policy Instruments

Macroeconomic Policy
Instruments
Tools to achieve macroeconomic
objectives
Policy options
Fiscal policy
Monetary policy
Supply-side policies
Fiscal policy
Taxation & spending decisions of a
government
Tax rates
Types of taxes & what it taxes
Composition, amount & timing of
government spending
Key aim
Influence AD
How?
Reflationary, expansionary or loose
fiscal policy = attempt to increase AD
Deflationary, contractionary or tight
fiscal policy = attempt to reduce AD
Other than AD, aims to …
Encourage consumption of merit goods
Discourage consumption of demerit
goods
Alter distribution of income
Alter incentives
Discretionary fiscal policy
When a government actively influences
AD by changing its expenditure or taxes
e.g. seeking to create greater economic
stability by offsetting changes in private
sector spending, i.e. acting countercyclically
Automatic stabilisers
Forms of government spending and taxation
that change automatically to dampen down
economic fluctuations
e.g. government spending on job seekers’
allowance falls when economic activity rises
e.g. when real GDP rises, will receive more
income tax without raising tax rate because
there will be more people employed & at
higher wages
Fiscal policy rules
Designed to create greater certainty &
stability
Golden rule - government should only
borrow to pay for investment spending,
i.e. must finance its current spending
through taxation
Types of taxes
Progressive tax
Takes a higher % from the income of the
rich
Income tax (direct tax)
Regressive tax
Takes a greater % from the income of the
poor
VAT (indirect tax)
Government spending
Capital expenditure (hospitals, schools,
roads)
Current spending (running of public services)
Transfer payments (transfer money from tax
payers to recipients of benefits)
Debt interest payments (made to holders of
government debt, e.g. National Savings
certificate holders)
Top 5 areas of government
spending in the UK
Social protection
Health
Education
Defence
Debt interest
The Budget
Chancellor of the Exchequer outlines
government spending proposals in 3year spending reviews
Tax changes announced in annual
budget
Provides information on budget position
for the past year + predictions for future
years
Budget position
Relationship between government spending
& tax revenue
Deficit - when government spending exceeds
tax revenue
Surplus - vice versa (will allow government to
repay some of debt)
Deficit or surplus caused by cyclical or
structural factors
Automatic stabilisers & discretionary fiscal
policy