1. 3.4 Managing the Economy Fiscal Policy
GCSE Economics
3.4 Managing the Economy
Fiscal Policy

2. Fiscal Policy
Definition – using Government spending and taxation to achieve economic objectives
demonstrate understanding of fiscal policy, including direct  and indirect taxation, and government spending and  borrowing;   
demonstrate understanding of why and how a government achieves a balanced budget, a budget surplus or a budget deficit;  
describe how a government uses fiscal policy to achieve its key economic objectives.

3. Direct taxes Taxes paid directly by people or firms to the Government
Mostly paid on income, wealth and profit;
Generally used for MACROECONOMIC reasons i.e. to control the economy as a WHOLE
Examples:
Income tax
National Insurance
Corporation tax
Inheritance tax
Capital gains tax
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4. Explain what the following taxes are paid on
Activity 1 – Direct Taxes
Explain what the following taxes are paid on
Tax
Paid on
Income tax
National Insurance
Corporation tax
Inheritance tax
Capital gains tax

5. Indirect taxes
Taxes paid indirectly by people or firms to the Government
Mostly paid on spending
Generally used for MICROECONOMIC reasons i.e. to affect the demand for particular products
Examples:
Value added tax (VAT)
Excise duties e.g. on tobacco, alcohol, petrol
Property taxes e.g Council tax, stamp duties
Other taxes e.g. on airports, insurance etc.
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6. Activity 2 – Direct taxes
Draw diagrams to explain the effect on price and quantity of a) VAT b) a specific tax such as tobacco tax

7. UK Government Income
Total £716 billion

8. Government Spending Made up of:
Social protection e.g. pensions, unemployment benefits, Disability Living Allowance
The Government gives people money but they decide what it is spent upon;
Final consumption e.g. on police, education, health and defence.
The Government decides what money is to be spent upon;
Debt interest on past Government borrowing and other spending such as contributions to the European Union (EU).

9. Activity 3 – Government Spending
Explain TWO reasons each for the Government providing: a) social protection such as pensions and disability benefits b) services such as police, education, health and defence

10. UK Government Expenditure 2016 - 2017
Total £772 billion

11. Budget Balance, Surplus and Deficit
A balanced budget means that the Government’s income is equal to its expenditure
If the Government spends less than it receives in taxes and other income it has a budget surplus and can repay the National Debt (money owed from the past)
If the Government spends more than it receives in taxes and other income it has a budget deficit and has to borrow money.

12. Government borrowing 1993-2015 £million
Source:

13. Why does it matter if the Government borrows money?
Has to pay it back in future years
Future generations will have to pay back money borrowed plus interest
Future governments will have less to spend so may have to cut spending or raise taxes

14. Fiscal Policy
Describe how a government uses fiscal policy to achieve its key economic objectives:
sustainable economic growth; 
ensuring price stability; 
maintaining exchange rate stability;  
balancing the current account; and 
reducing income inequality.

15. Fiscal Policy – Reflationary or Deflationary

16. Sustainable economic growth
Economic growth is an increase in the PRODUCTIVE CAPACITY of an economy.
It is generally measured by an increase in real GDP Fiscal policies to create economic growth include:
Cutting income tax so that people spend more;
Cutting corporation tax so that firms will have more profit to invest ;
Increased Government spending on roads, railways and other infrastructure
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17. Effect on economic growth
Activity 4 – Reflationary fiscal policy Explain how the policies below might help to create economic growth
Fiscal method
Effect on economic growth
Cutting income tax
Cutting corporation tax
Increased Government spending on infrastructure

18. Maintaining full employment
Fiscal policies to maintain full employment include:
Cutting employers National Insurance contributions
Providing or subsidising training to improve employee skills
Increasing Government spending to increase demand for goods and services
Reducing direct taxes such as income tax to increase disposable income and household spending

19. Ensuring Price Stability
The Government has a target of maintaining inflation at 2%
Fiscal policies to maintain price stability include:
Increasing income tax to reduce household spending
Cutting Government spending to reduce aggregate demand
reducing or freezing indirect taxes such as VAT and fuel taxes

20. Maintaining exchange rate stability
The exchange rate of sterling depends largely upon the current balance If the Government wishes to increase the value of the pound on the foreign exchange market it may use fiscal policy to reduce imports and/or increase exports (as shown in the next slide)
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21. Activity 5 – Maintaining exchange rate stability
Explain how reducing imports and increasing exports might help to increase the exchange rate of sterling. You should use diagrams to illustrate your answer

22. Balancing the current account
Current account = Value of exports minus Value of imports
If this is negative i.e. exports are LESS THAN imports, the Government may try to:
increase exports
e.g. through export subsidies, tax reliefs for exporters
and/or reduce imports
e.g. high taxes (known as tariffs) on imports, deflationary fiscal policy to reduce demand and therefore spending on imports

23. Reducing Income Inequality
The Government may try to redistribute income from higher-income to lower-income households.
Fiscal policies to reduce inequality include:
Progressive income tax i.e. higher earners pay a larger percentage of their income than the lower-paid
Increased spending on social security such as pensions, unemployment and disability benefits
Government provision of services such as health and education
Subsidies, tax exemptions and lower indirect taxes on basic items such as food, gas and electricity

24. Activity 6 – Reducing income inequality
Discuss whether the Government should:
Make high earners pay a higher percentage of their income in tax
Subsidise food, gas and electricity
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