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Chapter 19
FISCAL
POLICY
GEORGE OSBORNE IS THE
CHANCELLOR OF THE
EXCHEQUER IN THE UK
What is FISCAL Policy?
• FISCAL POLICY is the use of taxation and
spending to influence the economy in a number
of ways;
– Controlled by the government
– Policies are often politically motivated and therefore
can suffer from government failure
– The Chancellor sets out THE BUDGET in March of
each year
• http://www.hm-treasury.gov.uk/2011budget.htm
– In November or December the Pre Budget Report is
issued which forecasts tax and spending
The 2011 Budget Video
Check out this
great video
Source: Public Sector Databank January 2009
Where does the UK Government get
revenue from?
Source: Budget Report March 2011
How does the UK Government spend our
money?
Deficit
• Based on Chart 1 and Chart 2 what is the
predicted deficit for 2011-12 financial
year?
• Where will they get that money from?
Fiscal Policy - Key Terms 1
• Current spending
– Government spending on the day-to-day running of the public sector,
including raw materials and wages of public sector wages e.g. teachers
• Capital spending
– Government spending to improve the productive capacity of the nation,
including infrastructure, schools and hospitals
• Transfer payments
– Government payments to individuals for which no service is given in
return, e.g. benefit payments
• Balanced budget
– Government receipts equal government spending over the financial year
(April 6th – April 5th in UK and October 1st to September 30th in US)
Fiscal Policy - Key Terms 2
• Budget deficit
– Where government spending exceeds government receipts in a
financial year (PSNCR – Public Sector Net Cash Requirement)
• Budget surplus
– Where government receipts exceeds government spending in a
financial year (PSDR – Public Sector Debt Repayment)
• Demand side fiscal policy
– Changes in the level or structure of government spending and taxation
aimed at influencing one or more of the components of AD
• Discretionary fiscal policy
– The deliberate manipulation of government spending and taxation to
influence the economy.
Fiscal Policy - Key Terms 3
• Expansionary fiscal policy
– Increasing levels of government spending relative to
tax revenue, appropriate to stimulating AD during a
downturn in economic activity
• Contractionary fiscal policy
– Increasing levels of tax revenue relative to
government spending, appropriate during a boom in
economic activity
Taxation and Fiscal Policy
• Direct Taxation (Taxes on Income)
– Income tax
– National insurance contributions
– Corporation tax
• Indirect Taxation (Taxes on spending)
– VAT
– Excise duties e.g. tobacco and petrol
Spending and Fiscal Policy
• The government spends money on
– Current spending: to cover it’s running costs
and pay wages
– Capital spending: to improve the nation’s
productive capacity (LRAS to the right)
– Transfer payments: payments such as
benefits to the unemployed or sick
Deficit and Surplus
• In the 2011-12 financial year the government is
expected to spend in the region of £__________
more than it receives in revenue – A DEFICT
– That’s £________ per person in the UK!
– This is VERY high by historical figures and has been
caused due to the recession and increased speding
by the previous government
– PSNCR (or PSBR) national debt increases
– PSDR national debt falls
How big is the Govt?
How much does the UK owe?
Comment on the level
of UK National Debt
Cuts warning as public debt grows
Figures published this month by the Office for National Statistics (ONS) indicate
that Britain's national debt rose to £703.4bn in January, or 47.8% of gross
domestic product. It is the biggest proportion since 1978, when net debt was
49.1% of GDP.
The ONS said that figure would increase sharply if the money being pumped into
Britain's faltering banks was taken into account.
In an article for The Times on Thursday, Mr Bundred warned that if borrowing
pushed above 65% of GDP, there was a "distinct possibility" Britain could face "the
Armageddon scenario most feared by the Treasury: that there will be insufficient
lenders to match the planned level of borrowing".
Source: http://news.bbc.co.uk/2/hi/business/7916356.stm | 28th Feb 2009
Source: Public Sector Databank January 2009
Recent Deficit / Surplus
Performance in the UK
The use of Fiscal Rules
• Gordon Brown as Chancellor introduced
the GOLDEN RULE
– The government would only borrow to fund
capital spending balanced over the course of
the economic cycle
– In the later years of the Labour rule the
government found it harder and harder to
stick to this rule
Demand Side Fiscal Policy
• Discretionary fiscal policy
– Deliberate changes in fiscal policy e.g. spending on schools or
roads or cuts in tax to encourage investment
• Expansionary fiscal policy
– Aimed at increasing (or speeding up the increase in) AD
• Contractionary fiscal policy
– Aimed at reducing (or slowing down the increase in) AD
• Keynes’ Multiplier
– An initial £500 million increase leads to a greater later increase
– Can lead to overshoots and therefore inflation
AS/AD Analysis of Fiscal Policy
The UK Economy: Expansionary Fiscal Policy
Price
Level
Real
GDP
AS/AD Analysis of Fiscal Policy
The UK Economy: Contractionary Fiscal Policy
Price
Level
Real
GDP
AS/AD Analysis of Fiscal Policy
The UK Economy:
The Multiplier Following an Expansionary Fiscal Policy
Price
Level
Real
GDP
Supply Side Fiscal Policy
•
•
•
•
•
Labour market incentives
Capital spending
Entrepreneurship
Research and development and innovation
Improvements in human capital
ECONOMIC CONFLICT: Free market economists argue that government
intervention is ineffective. The Institute of Economic Affairs (IEA) is one such
group which believes that the government should reduce the size of government
and therefore the tax burden on society. I AGREE but KEYNES wouldn’t!
AS/AD Analysis of Fiscal Policy
The UK Economy:
Supply side policy e.g. reducing unemployment benefits
Price
Level
Real
GDP
AS/AD Analysis of Fiscal Policy
The UK Economy:
Supply side policy e.g. increased spending on infrastructure
Price
Level
Real
GDP
AS/AD Analysis of Fiscal Policy
The UK Economy:
Supply side policy e.g. making the education system more vocational
Price
Level
Real
GDP
Exam Style Questions - MCQ
Exam Style Questions - DR
Exam Style Questions - DR
Exam Style Questions - DR
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