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