Fiscal Policy
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Transcript of Fiscal Policy
Fiscal Policy
Manipulation of Government Spending and Taxation to achieve Macro Economic
Goals
Basics of Fiscal Policy
• Is all about Government Spending & Taxation
• Announced in the Budget and Autumn Statements by the Chancellor
Government Spending
• This is expenditure by the government on this things we need as a state such as defence or education.
• Makes up the G in Aggregate Demand
Taxation
• Many Different Forms of Taxation in the UK
• Indirect Taxes: Taxes that affect everyone such as VAT
• Direct Taxes, which include Income Tax
• There is also Corporation Tax, Stamp Duties and all other forms of Tax available
Government Budget Deficits
• A deficit is where spending is above the total revenue.
• The opposite to this is a Surplus.• At the moment we have a budget
deficit and this is financed through borrowing adding to our national debtCurrent UK National Debt (May 2012):
£1,042,842,006,054
One Trillion, forty two billion, eight hundred and forty two million six thousand and fifty four pounds
Fiscal Policy & Inflation
• If Demand Pill inflation is existence then a government would look to reduce Aggregate Demand
• This is called a deflationary fiscal policy
• This is done by using tax rises which will shift the AD Curve to the Left
AD & Deflationary Policy
AD1
Fiscal Policy & Unemployment
• Reflationary Policies can be used to reduce Unemployment
• Cutting Taxes or raising spending will help with this
• If a government cut taxes people have more disposable income so therefore spend more which increased Consumption and then AD.
• This would shift the curve to the right• However prices would rise
AD & Reflationary Policy
AD1
Fiscal Policy & Economic Growth
• Short Run– If there is unemployed resources, output
can be increased until all resources are fully employed
• Long Run– In order to have Long Run Growth AS
needs to be increased by investing in Education and Health
Fiscal Policy & Balance of Payments
• Two Options• Expenditure Reducing– Cutting Govt. Spending and raising
taxes to reduce AD. This reduced imports which will improve the trade balance
• Expenditure Switching– This encourages UK consumers to switch
from Imports to domestic products through tariffs on foreign goods
– Govt. spends on encouraging UK Exports
Advantages of Fiscal Policy
• Can have a significant impact on the Economy
• Can be discriminating which allows different regions or consumption habits to prosper
• Makes the distribution of income fairer through progressive taxes and benefits
Disadvantages of Fiscal Policy
• Can have effects on other areas which were not originally intended– E.g. Fall in taxes may hope to boost
consumption but end up with consumers sucking in Imports
• Time Lag is huge on Fiscal Policy• Some policy e.g. High Taxes may be
a disincentive to work