Chapter 38: Fiscal policy

What is fiscal policy (FP) * Do Getting started P171 Fiscal policy = 1.Government spending 2. Taxation 3. Government borrowing These are all shown in a government’s annual (yearly) budget Let’s check out the US 2011 budget html

The budget If government spending > revenue → budget deficit → need to borrow → PSNCR PSNCR = Public sector net cash requirement, i.e. how much the government needs to borrow to cover the budget deficit If government spending < revenue → budget surplus → repay government debt * Do Q1 P172 * What was the UK government’s largest expenditure on in 2008/9? P172 Government expenditure (spending) is either; 1. mandatory (compulsory) spending, e.g. pensions 2. discretionary spending (choice) spending, e.g. new airport

Taxation Why do governments tax? Brainstorm 1. to pay for public services e.g. health, (what others?) 2. to discourage certain activities e.g. smoking,.. 3. to control aggregate demand 4. make distribution of wealth fairer

Types of tax: 1. Direct taxes: taken directly from individuals or firms, for example; personal income tax national insurance contributions (NIC) which are pensions and NHS contributions corporate (company) tax capital gains tax, i.e. when $ is made from sale of shares, property, businesses inheritance tax Do you think these taxes are all fair? _rates

Types of Taxes (2) 2. Indirect taxes VAT (value added 17.5% in UK (exceptions = books, food, medicine, small firms) duties e.g. petrol, tobacco, alcohol vehicle excise duties – depends on engine size council tax – depends on value of property business rates - depends on value of property stamp duties – paid when buying houses or shares

Types of Taxes (3) 3. Environmental taxes landfill tax climate change levy; ↓ GHG, levied on suppliers of electricity, gas & coal Aggregates levy; ↓ quarrying, i.e. the extraction of natural resources from the ground *Do Q2 P174

Demand management Govt. uses F.P to influence agg. demand; ↑ G. spending &/or ↓ taxation = expansionary F.P (EFP) *What would be the effects of this on the economy? ↓ G. spending &/or ↑ taxation = contractionary F.P (CFP) *What would be the effects of this on the economy? The 2009 American Recovery and Reinvestment Act, which Obama said would create or save more than 3 million jobs, was estimated to cost the federal government $787 billion through increased government spending and tax cuts The Thai GDP in 2011 was $346 billion

What is FP used for? In groups analyse the effect of expansionary FP on the macroeconomic objectives (Chapters 31-36) EFP →  Inflation as AD  i.e. dd. Push inflation  Economic Growth: EFP →  EG, because  govt. spending →  jobs (govt. workers / contracts from new infrastructure, etc) &/or  tax →  disposable income Unemployment: as with 2 Current Account: EFP →  AD includes  imports → worsening of the CA Environmental protection: taxes to discourage negative externalities; subsidies to encourage positive externalities

Trade offs Trade off = we gain one thing but lose another, like opportunity cost Using FP (E or C) to influence one or more macroeconomic objective may negatively affect another Let’s say the country has a problem with high inflation; 1. What kind of FP should the government use? 2. What trade offs would this create on the other govt. objectives? Do Exam Practice P 175 Find an article related to fiscal policy; cut out the headline & be ready to explain it to the class