Fiscal policy Flashcards

Question

Fiscal Policy and Long Run Aggregate Supply

Answer 1

- Changes in marginal and average income tax rates can have a significant effect on work incentives in the labour market - State funding of R&D can have important effects on process innovation and the pace of dynamic efficiency in markets - Higher government spending on education & training can increase human capital & labour productivity to lift the long-term trend rate of growth - Changes in corporation tax and import tariffs can influence the size and direction of FDI - Government spending on new infrastructure is crucial to lift LRAS – it often makes private sector firms more efficient and profitable too

Answer 2

Changes in VAT affect the supply costs of businesses – a fall in VAT reduces costs and – ceteris paribus – will cause SRAS to shift outwards Changes in environmental taxes – a rise in a carbon tax will increase the costs especially of energy-intensive firms. SRAS will shift inwards Changes in import tariffs – lower tariffs as a result of trade liberalisation will lead – ceteris paribus – to lower costs, SRAS shifts outwards Changes in government subsidies – input subsidies paid to producers (such as farmers) lower their costs and cause an outward shift of supply

Answer 3

The OBR forecast tells the government whether it is on track to meet its fiscal targets and, if so, how much headroom it has against them (i.e. how much more it can increase spending / reduce taxes and still achieve its targets for borrowing and debt). This information is critical for sound economic and fiscal policy making. - provides information to the UK government’s creditors (i.e. financial markets) on the sustainability of public finances

Answer 4

According to George Osborne the OBR was introduced to “remove [from politicians] the temptation to fiddle the figures”. | Arguably one of the best legacies of the Cameron–Osborne government

Answer 5

“the only function of economic forecasting is to make astrology look respectable”

Answer 6

- They didn't produce a report for Rishi Sunak furlough scheme during COVID so why would they for her - the core purpose of the OBR is to produce twice-yearly forecasts of whether the Government is on track to meet its fiscal targets. We weren't due to set our spending plans until November so it would have been neither appropriate nor feasible for a report to have been produced in September.

Answer 7

- a type of indirect tax levied on general insurance premiums - reinsurance and life insurance are exempt

Answer 8

- A governmental process carried out by HM Treasury to set firm expenditure limits and, through public service agreements, define the key improvements that the public can expect from these resources. - Spending reviews typically focus upon one or several aspects of public spending while comprehensive spending reviews focus upon each government department's spending requirements from a zero base (i.e. without reference to past plans or, initially, current expenditure).

Answer 9

- Driven by a desire to reduce government spending in order to cut the budget deficit. - George Osborne announced the details of the spending review on 20 October 2010 - The review led to an £81 billion cut in public spending in the following 4 years of the parliament, with average departmental cuts of 19%. In addition; - £7 billion of extra welfare cuts, - changes to incapacity benefit, housing benefit and tax credits - rise in the state pension age to 66 - Public sector employees would face a £3.5 billion increase in public pension contributions.

Answer 10

The Home Office faced cuts of 25%,[10] local councils would face a yearly 7% cut in funding from central government each year until 2014.[10] The Ministry of Defence faced cuts of around 8%. DEFRA withdrew funding support from seven waste management PFI projects, the BBC had its licence fee frozen for 6 years and took on the funding of the BBC World Service. The OBR predicted that the spending review led to a loss of about 490,000 public sector jobs by 2015

Answer 11

- The portion of additional disposable income that is saved by a consumer - MPS = Change in Saving ÷ Change in Income - typically higher at higher incomes. - MPS helps determine the Keynesian multiplier -

Answer 12

At low-income levels, consumers will be buying all the necessities of life. An increase in income, will probably all be spent. At higher income levels, with all necessities bought, saving becomes an affordable extra.

Answer 13

As income levels rise, extra income has a diminishing utility and so consumers may not know what to spend the money on and therefore spend an increasing percentage. The Keynesian consumption function shows that the marginal propensity to consume falls at higher incomes – meaning the marginal propensity to save rises.

Answer 14

Theories of life-cycle spending assume individuals wish to smooth out their consumption over a period of time. During a period of studying, marginal propensity to save will be zero (student probably will borrow. As they get a better-paid job and pay off their debts, they will be in a position to increase savings. During their mid-working life, individuals will tend to have a higher propensity to save – as they put money aside for retirement.

Answer 15

Not all individuals are rational. Approx 25% of individuals do not follow the life-cycle hypothesis models and may fail to save, when rational utility maximisation may suggest they should. Some individuals are more prone to present-income bias. This means individuals place a higher weighting on consumption in present moment, than saving for future.

Answer 16

Not all individuals are rational. Approx 25% of individuals do not follow the life-cycle hypothesis models and may fail to save, when rational utility maximisation may suggest they should. Some individuals are more prone to present-income bias. This means individuals place a higher weighting on consumption in present moment, than saving for future.

Answer 17

In The Wealth of Nations (1776), Adam Smith argued that taxation should follow the four principles of equity, certainty, convenience and economy. - The characteristics or qualities which a good tax system should possess

Answer 18

requires a tax to be cheap to collect in relation to the revenue it yields

Answer 19

requires a tax to be convenient for taxpayers to pay

Answer 20

Taxpayers should be reasonably certain of the amount of tax they will be expected to pay - Taxes should be clear and transparent - not arbitrary with respects to the time of payment, the manner of payment, the quantity to be paid (tax liability).etc

Answer 21

Requires a tax to be fair - If everyone is asked to pay taxes according to his ability, then sacrifices of all taxpayers become equal. This is the essence of canon of equality (of sacrifice).

Answer 22

A tax should meet its desired objective(s) with minimum unintended consequences

Answer 23

Requires a tax to be easy to change to meet new circumstances

Answer 24

- Liberalized international financial markets attract capital to countries with favorable tax regimes. - High personal income taxes may discourage individuals from working more and incentivize leisure activities. - High taxation on savings can lead individuals to prioritize current consumption over saving for the future

Answer 25

- There should be some equivalency between what an individual ends up paying and the advantages they get as a result of government actions - Taxes the benefits that someone gets from a public product or service - Example; charge for crossing a Toll Bridge. Higher level of usage = higher taxes - Unfair: taxpayers who have lower incomes may end up paying more in taxes than those with higher incomes

Answer 26

- Taxes should be levied dependent on a person's means to pay - Charges you based on your earnings - Unfair: higher-income individuals pay more in taxes, regardless of their actual use of public services, leading to resentment for funding services they do not use - three kinds of ways to measure ability to pay: salary, spending, and property

Answer 27

- We can't always quantify the benefits of government expenditure - It presumes that individuals with greater incomes are less bothered by paying taxes than those with lower incomes

Answer 28

If a low-income individual takes public transit to work considerably more frequently than a wealthier person, then if they are burdened with higher taxes to support the transportation system, they may struggle to afford essentials like food and rent, hindering their ability to save or improve their financial situation.

Answer 29

in his book 'The Wealth of Nations', he argued that taxpayers should serve as customers of the state, their tax payment akin to payment for products or services utilised.

Answer 30

Automatic stabilisers are automatic fiscal changes as the economy moves through different stages of the business cycle

Answer 31

- Tax revenues will rise as household real incomes and corporate profits grow m - Employment increases as output increases and employment is derived from output, meaning that Government welfare spending then falls as previously unemployed people now require less state financial support - As a result, government finances improve including a falling budget deficit / possible fiscal surplus - Consequently, fiscal policy is taking income out of the circular flow; automatic stabilisers help moderate a boom

Answer 32

- Real output and employment contracts - As real incomes fall workers pay less in direct and indirect taxes and company tax payments also drop - Gov spending on welfare support (e.g. Universal Credit) increases Combined, this will increase budget deficit A fiscal deficit is a net injection into the circular flow – thus helping to limit the depth / severity of a recession

Answer 33

As an individual taxpayer earns higher wages, their additional income may be subjected to higher tax rates based on the current tiered structure. If wages fall during a recession, the individual will remain in the lower tax tiers as dictated by their earned income.

Answer 34

- The 2008 one-time tax rebates under the Economic Stimulus Act - The $831 billion in federal direct subsidies, tax breaks, and infrastructure spending under the 2009 American Reinvestment and Recovery Act - The Coronavirus Aid, Relief, and Economic Security (CARES) Act became the largest stimulus package in U.S. history. It provided over $2 trillion in government relief

Answer 35

Since they almost immediately respond to changes in income and unemployment, automatic stabilizers are intended to be the first line of defense to turn mild negative economic trends around. However, governments often turn to other types of larger fiscal policy programs to address more severe or lasting recessions or to target specific regions, industries, or politically favored groups in society for extra-economic relief.

Answer 36

Keynes noted that in a recession, confidence falls and the private sector cut back on spending and investment. Therefore, we see a rise in private savings and a fall in aggregate demand. This can worsen the recession. This is why Keynes advocated government borrowing – to make use of these surplus savings. Keynes argued that automatic stabilisers may not be enough, and the government should specifically find public sector projects to inject money into the circular flow. This is known as discretionary fiscal policy

Answer 37

- Income taxes are generally at least somewhat progressive. This means that as household incomes fall during a recession, households pay lower rates on their incomes as income tax. Therefore, income tax revenue tends to fall faster than the fall in household income. - Corporate tax is generally based on profits, rather than revenue. In a recession profits tend to fall much faster than revenue. Therefore, a company pays much less tax while having slightly less economic activity. - Sales tax depends on the dollar volume of sales, which tends to fall during recessions.

Answer 38

They impact real GDP indirectly through their effect on consumption. When someone gets a tax rebate from the government, it is not counted as government spending because the government is not buying anything from them. But when they spends that money on veggie burgers and baseball gear, it gets counted in consumption.

Answer 39

Automatic stabilizers avoid the decision lag that discretionary fiscal policy suffers from. Whereas discretionary fiscal policy takes longer because people ask questions like "What kind of output gap are we in? Positive or Negative?" and other such questions are asked in legislative positions where it may take a longer time for people to agree on the necesary policy in order to smooth the buisness cycle.

Answer 40

Economies can use expansionary monetary and fiscal policies, such as lowering interest rates and increasing government spending. Long-term solutions like job training programs can help address skills gaps caused by technological advances.

Answer 41

High levels of public debt limit a government's fiscal flexibility, potentially leading to prolonged periods of hysteresis as the need to service debt restricts spending in other critical areas.

Answer 42

Fiscal federalism refers to the financial relations between units of government in a federal system, dealing with the division of governmental functions and financial relations among levels of government.

Answer 43

- The term fiscal federalism was introduced by the German-born American economist Richard Musgrave in 1959. - Musgrave argued that the federal or central government should be responsible for economic stabilization and income redistribution. - Musgrave believed that the allocation of resources should be the responsibility of state and local governments

Answer 44

Benefits of fiscal decentralization include accounting for regional and local differences, lower planning and administrative costs, competition among local governments, and more efficient politics with greater citizen influence.

Answer 45

Disadvantages include lack of accountability of state and local governments, lack of qualified staff, the possibility for people to choose where to reside, local governments' independence from the national government, and unavailability of infrastructure for public expenditure at the local level.

Answer 46

Federal government intervention is necessary because states and localities are not equal in their income and resources, requiring federal action for economic stability and income redistribution.

Answer 47

The New Deal increased interactions and central planning among levels of government, contributing to the development of national policy making and state and local policy implementation.

Answer 48

According to public choice analyses, government agents behave as individuals responding to incentives, similar to actors within a market, which can influence their actions and decisions.

Answer 49

- Referred to as corporation or county loans. - Frequently referred to simply as funds

Answer 50

- Keynes suggested that fiscal policy should be used countercyclically to offset economic extremes of expansion and contraction, inflation and recession. - Budget should be in deficit when the economy is slowing and in surplus when economic growth is booming

Answer 51

Following World War II, the significant problem was a surge in inflation, reaching upwards of 20% by March of 1947. | In the USA!

Answer 52

refers to the principle that each generation should have the opportunity to enjoy a similar quality of life as the previous generation, and that they should not bear an undue burden of negative consequences from the actions of previous generations.

Answer 53

- Distribution of natural resources - Preservation of the environment for future generations - Fair distribution of economic opportunities - How high national debt might necessitate higher future taxes, affecting future generations' welfare

Answer 54

Departmental Expenditure Limits (DELs) and Annually Managed Expenditure (AME). - DELs mostly cover spending on public services, grants, and administration and investment - AME includes categories of spending less amenable to multi-year planning, such as social security spending and debt interest. ## Footnote Debt interest spending is one of the largest items in AME

Answer 55

Most public sector debt interest spending is accounted for by **central government** and payments relating to funded **pension schemes** in the public corporations sector.

Answer 56

Interest paid on government bonds (gilts), payments to holders of NS&I savings products, and interest on the reserves created by the Bank of England for monetary policy purposes. ## Footnote Interest paid by central government on gilts held by BoE do not leave the public sector Because BoE is part of the public sector

Answer 57

Conventional gilts, which pay a fixed amount of interest, and index-linked gilts, which pay an interest rate linked to RPI inflation.

Answer 58

Debt interest spending as a share of GDP.

Answer 59

- They fell by 0.8 per cent of GDP - The principal drivers of the fall were the **increase in gilts** held in the APF, low RPI **inflation**, and historically low **interest rates**

Answer 60

- There was a further 0.5 per cent fall. - Lower inflation, lower interest rates, and further expansion of asset purchases through the APF.

Answer 61

- £111.5 billion. 4.4 per cent of GDP. - A 40-year high inflation rate and surging interest rates.

Answer 62

Forecasts assess the likely evolution of public finances based on existing Government tax and spending policies and economic trends

Answer 63

- £1,139 billion, equivalent to around £39,000 per household or 40.9 per cent of national income. - £1,226 billion, equivalent to around £42,000 per household or 44.0 per cent of national income.

Answer 64

- A deficit of £87.2 billion. - The deficit is expected to fall to £39.4 billion.

Answer 65

- 89 per cent - Income tax and National Insurance contributions, expected to raise around £470 billion together. - £176 billion. - Interest earned on assets (such as foreign exchange reserves and student loans) and income generated by public corporations.

Answer 66

- Income tax and capital gains tax. - Due to wages and salaries growing faster than frozen tax thresholds - Due to asset markets, like housing and the stock market.

Answer 67

Tobacco duty (due to declining smoking rates) and UK oil and gas receipts (due to falling energy prices and production).

Answer 68

- Health (£179.6 billion), education (£84.9 billion), and defence (£32.8 billion). - £136.0 billion, which is 11 per cent of the total public spending.

Answer 69

- Cash transfers through the welfare system, expected to cost £315.1 billion - 55 per cent, with state pensions being the largest item at £141.6 billion. - Universal credit and related tax credits and benefits (£92.0 billion) and disability benefits (£47.0 billion).

Answer 70

- £73.5 billion - Interest paid to private sector holders of government bonds ('gilts') and interest paid by the Bank of England on money created during quantitative easing.

Answer 71

"*The lifeblood of economic growth is private sector investment* "

Answer 72

To mobilize billions in **private investment** and generate a **return for taxpayers** by aligning key **public finance** institutions. ## Footnote Will increase econ growth by supporting transformative investments that create jobs, boost energy independence, and drive growth across various sectors.

Answer 73

By combining catalytic capital with government policy certainty to provide confidence to private investors.

Answer 74

By mobilizing institutional capital through its investments and acting as the largest investor in UK venture capital.

Answer 75

Clean energy, infrastructure, ports, heavy industry, manufacturing, and other green growth industries.

Answer 76

Increased efficiency in investment processes, improved access to finance for businesses, and enhanced ability to attract private capital.

Answer 77

By making strategic investments in future industries, it aims to rebuild the economy's foundations and ensure sustainable growth.

Fiscal policy Flashcards

(105 cards)