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Fiscal Policy
AS Economics
Income tax quiz
1. Why was income tax originally introduced?
2. When does income tax expire?
3. What does ‘PAYE’ stand for?
4. Which 4 of the following have all been taxed at one point in the UK?
Cats
Female Servants
Dogs
Hair
Books
Windows
Watches Children’s shoes
5. What is the normal final deadline for sending in a tax return?
6. On which of the following might income normally tax be charged?
a) Interest from a savings account.
b) Earnings from a job.
c) Proceeds from selling a picture.
d) State retirement pension.
e) Sale of shares
What is fiscal policy?
• Fiscal policy is changes in taxation and
government spending to meet
macroeconomic objectives
• What are the government’s macroeconomic
objectives?
• Can be used to influence AD or AS
• FP is less important as the main tool is now
monetary policy
Government Spending 2011 - 2012
Government Receipts
2011 - 2012
• Total spending = £710bn
• Total receipts = £589bn
• What is the forecast PSNCR for 2011-2012?
Historical receipts and spending
Changes in spending and taxation
• These occur from changes in government
policy, what they want to provide e.g. public
and merit goods and what they want society
to benefit from
• Taxation may focus on negative externality
goods like alcohol, fuel and tobacco
• Changes in the economic cycle might mean
the government can reduce or increase
spending
Taxes/spending in boom and recession
Tax/spending
Boom
Recession
Income tax
Excise duties
VAT
Job Seeker’s
allowance
These are known as automatic stabilisers as they
automatically adjust to the economic circumstances
Taxes and spending
• Taxes – direct – income tax, national insurance
– based on income – also tax rates and bands
can have an effect
• Taxes – indirect – VAT, excise duties (fuel,
tobacco, alcohol)
• Spending may impact on AD, e.g. a new rail
link (Crossrail) will have more of an impact on
AD than some other forms of government
spending
Government spending
• Current spending – day to day running of
public services, wages, materials etc
• Capital spending – helps to improve the
productive capacity through new roads,
railways, schools, hospitals
• Transfer payments – social security payments
like JSA
Budget deficits and surpluses
• Budget deficit when spending exceeds
revenue. Can be eliminated by cutting
spending and/or increasing taxes. A deficit is
financed through PSNCR
• Budget surplus when revenue exceeds
spending. This results in a PSDR which pays
back previous borrowing
• Could also be a balanced budget
Economic cycle and the budget
• In periods of recession, a
budget deficit is more
likely through lower tax
revenues and increased
spending (e.g. on
benefits); during a boom,
a budget surplus is more
likely.
• Over the economic cycle,
a balance is likely to be
achieved
Surplus
Deficit
Demand side fiscal policy
• Discretionary fiscal policy involves deliberate
changes in direct and indirect taxation
• To stimulate AD, taxes can be lowered or
spending increased; this is known as
expansionary fiscal policy
• AD will shift right and should have little
influence on P, but if too much is stimulated
then AD could shift too far causing P to rise
and inflation. What type of inflation is this?
Demand side fiscal policy
• Economic growth can be slowed down by a
contractionary fiscal policy, spending reduced
and tax increased.
Supply side fiscal policy
• Changes to SS tend to be longer term in
nature and fine tune the economy;
• Labour market incentives
• Capital spending
• Entrepreneurship
• Research & Development and Innovation
• Improvements in human capital