Fiscal Policies

You all owe me Wolverhampton – unemployment… Past paper due next lesson…

Which EU country is this?

Aims Understand the practical application of fiscal policy To be aware of the impact of budget deficits on aggregate demand. An analyse the usefulness of fiscal policy as a short term and long term tool for macro economic objectives

ions/the-billion-pound-o-gram/

2/tax-gap-information-beautiful#zoomed-picture Click to see clearly

Fiscal policies… Influencing the level of economic activity though manipulation of government income and expenditure Associated with Keynesian Demand Management Policies Influence Aggregate Demand – –Tax regime influences consumption (C) and investment (I) –Government Spending (G) Influences key economic objectives Acts as an ‘automatic stabiliser’ What does this mean?

Budget deficit and budget surplus… can you see them?

Deficit Surplus Deficit

Watch this Watch carefully and make a note of… The different types of tax mentioned How much the government forecast it’s debt to be Now much the UK debt is predicted to overshoot this forecast…

How many taxes can you think of?

Taxation options Corporation Capital Gains Tax Inheritance Excise duties Business rates Council tax Income tax VAT Betting Tax Insurance premium tax Royalties Tariffs Road tax TV licence Council tax NI contributions Congestion Charge Stamp duty Airport tax Pigouvian tax – environment

Tax revenue generated…

Why does the government tax? Revenue To raise revenue to finance government spending (e.g. on public and merit goods and services) Managing aggregate demand To help meet the government’s macroeconomic objectives such as stable inflation and economic growth Changing the distribution of income and wealth A progressive system of taxation can help bring greater equality in income & wealth between households The government may intervene directly through fiscal policy to on grounds of equity Market failure and environmental targets Taxes can correct for externalities – a source of market failure

Government spending

Government spending (G) Government (or public) spending each years takes up over 40% of gross domestic product Spending by the public sector can be broken down into three main areas: (1)Transfer Payments: i.e. welfare payments made to benefit recipients such as the state pension and the Jobseeker’s Allowance (2) Current Government Spending: i.e. spending on state-provided goods & services such as education and health (3) Capital Spending: i.e. infrastructural spending such as spending on new roads, hospitals, motorways and prisons

Public Sector Spending

Why Have Government Spending? Direct government (public sector) provision of –Public Goods –Merit Goods Provide welfare support for low income households / the unemployed Government spending is also a means of redistributing income within society e.g. to reduce the scale of relative poverty Government spending can also be used as a tool to manage aggregate demand (GDP) as part of macroeconomic policy

Budget Deficit or Surplus? Any chance of a balanced budget?

The budget deficit / surplus The budget deficit measures how much the government sector needs to borrow each year to finance its own spending The national debt is the total amount of borrowing undertaken by the government that has not yet been repaid A budget deficit arises when government expenditure exceeds government revenue (G>T) and a positive PSNCR.

The budget deficit / surplus The budget deficit measures how much the government sector needs to borrow each year to finance its own spending The national debt is the total amount of borrowing undertaken by the government that has not yet been repaid A budget deficit arises when government expenditure exceeds government revenue (G>T) and a positive PSNCR. Never ever to be Confused with Current account deficit / surplus BoP

PSNCR Public Sector Net Cash Requirements: In 2011 – govt intends to spend £704bn It’s hoping to receive £541bn What’s the PSNCR for 2011? £163bn

Government budget balances What’s the difference between current and real?

Taxation and Aggregate Demand How can taxes have a big effect on aggregate demand?

The fiscal policy transmission mechanism Cut in personal income tax Boost to disposable income Adds to consumer demand Cut in indirect taxes Lower prices – higher real incomes Adds to consumer demand Adds to business capital spending Cut in corporation tax Higher “post tax” profits for businesses Rise in government spending Direct boost to aggregate demand Possible multiplier effects on national income Expansionary Fiscal Policy

Fiscal Policy & automatic stabilisers!

Automatic Stabilisers… Boom What happens to Tax revenue? Increases What happens to transfer payments? Falls Recession What happens to Tax revenue? Falls What happens to transfer payments? Increases

Got to here!

Which one of the following is an example of fiscal policy? A decision by the government to A decrease the exchange rate. B raise the minimum wage. C increase its budget surplus. D reduce the rate of interest.

A current account deficit on the UK’s balance of payments means that generally A the total value of imports exceeds the total value of exports. B government expenditure exceeds government revenue. C the value of imports of services is less than the value of exports of services. D the volume of imports of goods and services exceeds the volume of exports of goods and services.

In the short run, an increase in the government’s budget deficit is most likely to reduce A imports. B unemployment. C interest rates. D inflation.

Demand-pull inflation is most likely to be caused by A total spending exceeding productive capacity. B an increase in output. C a rise in raw material prices. D a rise in interest rates.

UK debt & deficit In the financial year 2009/10 the UK recorded general government net borrowing of £159.8 billion, which was equivalent to 11.4 per cent of gross domestic product (GDP). At the end of March 2010 general government debt was £ billion, equivalent to 71.3 per cent of GDP.

UK debt & deficit The Maastricht Treaty's Excessive Deficit Procedure sets deficit and debt reference levels of 3 per cent and 60 per cent respectively for all EU countries.

The collapse in tax revenues Tax revenues tend to fall during a recession –More people unemployed – less money from income tax –Squeeze on business profits – less revenue from corporation tax –Decline in consumer spending – hits income from VAT and duties –Drop in average house prices – affects revenue from stamp duty –Possible rise in tax avoidance and tax evasion –Cuts in bonuses and other payments e.g. overtime pay The latest figures for the government show a big drop in tax receipts These reflect the slowdown in 2008 rather than the recession Prospect of much worse to come in

Main Sources of Revenue

Should we be worried about a reduction in tax take? No –In a recession, tax revenues fall automatically – this is part of what is known as the automatic stabilisers –Some of the reduced tax revenue comes from decisions by the government to cut taxes to boost the economy –Some comes from lower oil/petrol prices Yes –This is a sign of an economy heading into a very deep recession –The drop in revenues is causing a huge rise in the budget deficit - public sector net borrowing is now almost three times higher than at the same stage last year –The result will be an enormous deficit which will required either higher taxes in the future or cut-backs in government spending –Some of the tax cuts introduced have been ineffective in increasing AD

Video clip – putting UK economy into perspective