Role of the state in the macroeconomy: public expenditure Microeconomics Topic 1: The Economic Problem Role of the state in the macroeconomy: public expenditure

Microeconomics Topic 1: The Economic Problem 4.5.1 Unit content Students should be able to: Distinguish between capital expenditure, current expenditure and transfer payments Assess reasons for the changing size and composition of public expenditure in a global context Analyze the significance of differing levels of public expenditure as a proportion of GDP on: productivity and growth; living standards; crowding out; level of taxation; equality

Microeconomics Topic 1: The Economic Problem (a) Recap 2.6.2 What is fiscal policy? This is run by ________________ What is a contractionary fiscal policy? When is it used? What are the other two policies called?

Microeconomics Topic 1: The Economic Problem (a) Recap 2.4.1/2 What is the circular flow and what is tax in relation to this?

(a) Recap 2.4.1/2: the circular flow of income diagram

Microeconomics Topic 1: The Economic Problem (a) Recap 2.6.2 What is the difference between direct and indirect tax? Direct tax refers to the E.g. Indirect tax is The burden of tax may fall on the consumer or the firm or a combination, what does it depend on? Examples of indirect tax?

(a) Label the following as direct or indirect tax: Topic 9: aggregate demand and aggregate supply (a) Label the following as direct or indirect tax: Use to reduce negative externalities caused by smoking Helps reduce inflation by lowering aggregate demand Increases cost push inflation May lead to black market Progressive tax (rate increases as incomes increase) Regressive tax (makes income distribution more unequal) Tax evasion is not possible because it is included in the price of the goods and services Tax evasion is possible

(a) Definitions: expenditure Microeconomics Topic 1: The Economic Problem (a) Definitions: expenditure Capital expenditure: refers to _____________ investment expenditure on capital projects such as Crossrail or _____________ by the________________ These are items that are used over a time period longer than a year. Current expenditure: relates to the government’s day- to-day expenditure on ___________ and services. E.g. salaries of civil servants or ________ used by the NHS •Total government spending = capital expenditure + current expenditure drugs; goods; government; long-term; new hospitals

(a) Definitions: transfer payments Microeconomics Topic 1: The Economic Problem (a) Definitions: transfer payments • Transfer payments: those made by the ____________ to _________________ without there being any exchange of goods or services: there is no production in return for these payments. What are transfer payments used for? Give examples:

(b) UK government expenditure 2016: comment on the graph Microeconomics Topic 1: The Economic Problem (b) UK government expenditure 2016: comment on the graph

(b) Germany, Japan, UK and US government expenditure over time Microeconomics Topic 1: The Economic Problem (b) Germany, Japan, UK and US government expenditure over time

(b) Why does the size and composition of public expenditure change? Microeconomics Topic 1: The Economic Problem (b) Why does the size and composition of public expenditure change?

(b) What did George Osborne say about reducing public expenditure? Microeconomics Topic 1: The Economic Problem (b) What did George Osborne say about reducing public expenditure? Osborne’s idea was that __________ the size of the public sector leaves room for the __________ sector to create _____________ (2010). jobs; private; reducing

(b) 35 business leaders backed Osborne’s cuts Microeconomics Topic 1: The Economic Problem (b) 35 business leaders backed Osborne’s cuts The bosses of companies including BT, Kingfisher, Asda, Carphone Warehouse, Microsoft UK, Whitbread, Alliance Boots, Diageo and Next claim that "addressing the debt problem in a decisive way will improve business and consumer _________________". They insist that "the private sector should be more than capable of generating _____________ jobs to replace those lost in the public sector". And they argue that if the cuts are ____________, there would eventually be deeper cuts or greater tax rises, to meet the increased ___________ costs on national debt additional; confidence; delayed; interest

Microeconomics Topic 1: The Economic Problem (c) How do high levels of public expenditure affect productivity and growth?

(c) How does public expenditure affect living standards? Microeconomics Topic 1: The Economic Problem (c) How does public expenditure affect living standards? Low government spending can _________ living standards Market failure will occur as the private sector will _________________ and consumers will _________________ public goods What are public goods? But firms may be able to charge in some instances though e.g. However, to evaluate, lower taxes will mean that:

(c) How do high levels of public expenditure affect crowding out? Microeconomics Topic 1: The Economic Problem (c) How do high levels of public expenditure affect crowding out? High spending may lead to crowding out. Crowding out is when __________ government spending leads to lower private sector spending. Resource crowding out occurs when the economy is operating at ______ employment and the expansion of the public sector means that there is a shortage of resources in the private sector. Financial crowding out arises when the expansion of the state sector is ____________ by increased government ___________. This causes an increased demand for loans which drives ____ interest rates and crowds out private sector investment. borrowing; extra; financed; full; up

(c) How does public expenditure affect level of taxation? Microeconomics Topic 1: The Economic Problem (c) How does public expenditure affect level of taxation? High government spending tends to mean: However High tax can act as a “disincentive”: RECAP: draw two diagrams (with different demand curves) overleaf showing the impact of a specific tax on cigarettes and the incidence of tax on consumers. What economic concept does this also show?

Microeconomics Topic 1: The Economic Problem (c) Recap tax diagrams

(c) How does public expenditure affect equality? Microeconomics Topic 1: The Economic Problem (c) How does public expenditure affect equality? Government expenditure can reduce absolute poverty through ________ payments and through provision of ____________ government spending gini coefficient as a % of GDP 38% 0.45 44% 0.324 58% 0.268 Finland, UK, USA

(c) How do high levels of public expenditure affect the national debt? Microeconomics Topic 1: The Economic Problem (c) How do high levels of public expenditure affect the national debt? Debt (£1.6 trillion September 2016) versus budget deficit (£68 billion) Successive years of a budget deficit, would _______ the size of the national debt. This would result in increased ___________ payments on the national debt which may mean that less public expenditure is available for spending on _________ services such as new schools and _____________ But, if there is increased public expenditure on infrastructure etc. then: hospitals, increase, interest, public

Recap questions (1) and (2) Microeconomics Topic 1: The Economic Problem Recap questions (1) and (2) 1. Define what is meant by fiscal policy (2 marks) 2. Distinguish between current expenditure, capital expenditure and transfer payments (6 marks)

Microeconomics Topic 1: The Economic Problem Recap question (3) (3) With reference to the data, list the three largest items of expenditure and the three largest tax receipts (6 marks)

Recap questions (4) to (7) Microeconomics Topic 1: The Economic Problem Recap questions (4) to (7) (4) Does the data suggest the government is running a Budget surplus or deficit? (3 marks) (5) What does the government use fiscal policy for? (3) (6) What purpose does the Office for Budget Responsibility have? (3 marks) (7) Explain what is meant by ‘the Golden Rule’ (2 marks)