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Updated (20123) revision presentation on aspects of fiscal policy - designed for student and teachers taking the AS macro paper.
Citation preview
15:35
Fiscal Policy and the Economy
AS Macro – Autumn
2013
15:35
What is fiscal policy?• Fiscal policy involves the use of government spending, taxation and
borrowing to affect the level and growth of aggregate demand, output and jobs
• Fiscal policy is also used to change the pattern of spending on goods and services
• It is also a means by which a redistribution of income & wealth can be achieved for example by changing tax rates on different levels of income or wealth
• It is an instrument of micro-economic government intervention to correct for free-market failures such as pollution or the sub-optimal provision of public and merit goods
• Changes in fiscal policy affect aggregate demand (AD) and aggregate supply (AS)
15:35
Some key roles for fiscal policy
Financing key areas of government spending
Altering the distribution of income and wealth
Providing a welfare state safety-net for families
Managing the macroeconomic cycle
Improving country’s competitiveness
Tackle market failures through intervention
15:35
Some key roles for fiscal policy
Financing key areas of government spending
Altering the distribution of income and wealth
Providing a welfare state safety-net for families
Managing the macroeconomic cycle
Improving country’s competitiveness
Tackle market failures through intervention
15:35
Some key roles for fiscal policy
Financing key areas of government spending
Altering the distribution of income and wealth
Providing a welfare state safety-net for families
Managing the macroeconomic cycle
Improving country’s competitiveness
Tackle market failures through intervention
15:35
Some key roles for fiscal policy
Financing key areas of government spending
Altering the distribution of income and wealth
Providing a welfare state safety-net for families
Managing the macroeconomic cycle
Improving country’s competitiveness
Tackle market failures through intervention
15:35
Some key roles for fiscal policy
Financing key areas of government spending
Altering the distribution of income and wealth
Providing a welfare state safety-net for families
Managing the macroeconomic cycle
Improving country’s competitiveness
Tackle market failures through intervention
15:35
Some key roles for fiscal policy
Financing key areas of government spending
Altering the distribution of income and wealth
Providing a welfare state safety-net for families
Managing the macroeconomic cycle
Improving country’s competitiveness
Tackle market failures through intervention
15:35
Direct and Indirect Taxation
• Direct taxation is levied on income, wealth and profit. Direct taxes include income tax, inheritance tax, national insurance contributions, capital gains tax, and corporation tax.
• Indirect taxes are taxes on spending – such as excise duties on fuel, cigarettes and alcohol and Value Added Tax (VAT) on many different goods and services
15:35
Micro recap – indirect taxes!
Price
Qty
S1
Q1
Price
Quantity
D1
S + Tax
P2
Q2 Q1
P1D1
Q2
P1
An ad valorem tax when demand is inelasticA specific tax when demand is elastic
S + Tax
P2
S1
15:35
Micro recap – indirect taxes!
Price
Quantity
S1
Q1
Price
Quantity
D1
S + Tax
P2
Q2 Q1
P1D1
Q2
P1
An ad valorem tax when demand is inelasticA specific tax when demand is elastic
S + Tax
P2
S1
15:35
Justifications for taxation
• Revenue to pay for government spending – (e.g. on public and merit goods and services)
• Managing aggregate demand – To help meet objectives such as stable inflation and
growth
• Changing distribution of income and wealth – A progressive system of taxation can help bring
greater equality in income & wealth between households
15:35
Direct Taxes• Direct taxation is levied on income,
wealth and profit
• Direct taxes include – income tax
– national insurance contributions
– capital gains tax
– corporation tax
• The burden of a direct tax cannot be shifted
• Over the last twenty years in the British economy, there has been a shift towards indirect taxes
15:35
Tax Knowledge!Tax Tax rate (%, or level)
Income tax
Basic rateHigher rateAdditional rateVAT
National insurance contributions (employees)
Inheritance tax (threshold for paying = £325K)
Beer (duty per pint, 3.9% abv)
Cigarettes (duty on pack of 20, includes VAT)
15:35
Tax Knowledge!Tax Tax rate (%, or level)
Income tax
Basic rateHigher rateAdditional rate
20%40%45%
VAT 20%
National insurance contributions (employees) 12%
Inheritance tax (threshold for paying = £325K) 40%
Beer (duty per pint, 3.9% abv) 43p
Cigarettes (duty on pack of 20, includes VAT) £4.52
15:35
Income TaxComponent
Income tax free personal allowance* £9,440
Tax rate on taxable income:
Basic rate: 20% £0-£32,010
Higher rate: 40% £32,011- £150,000
Additional rate: 45% from 6 April 2013 Over £150,000
* The Personal Allowance reduces where the income is above £100,000 - by £1 for every £2 of income above the £100,000 limit.
15:35
The Effective Tax Rate in the UK
The total effective tax rate – is the total amount paid by households in both direct and indirect taxes as a percentage of their gross income.
15:35
The main tax revenues for the UKThere was a sustained rise in tax revenues during the long boom for the UK economy
Recession and slow recovery has hit tax receipts
15:35
How taxes and benefits affect the distribution of income
Average income per Quintile groups
household (£ per year)
Bottom 2nd 3rd 4th Top
Cash benefits 7 419 8 448 7 187 4 388 2 453
Benefits in kind 7 674 7 386 7 380 6 260 5 238
Direct taxes -1 306 -2 263 -4 781 -8 887 -19 905
Indirect taxes -3 400 -4 009 -5 206 -6 230 -8 743
Net position 10 387 9 561 4 580 -4 469 -20 958
Source: Office for National
Statistics
15:35
Taxes, welfare and income inequality Percentage shares of income for ALL households in 2012 Original Gross Disposable Post-tax income income income incomeQuintile group Bottom 3 7 8 7 2nd 7 11 13 12 3rd 14 16 17 16 4th 24 23 22 22 Top 51 43 41 42 All households 100 100 100 100 Decile group Bottom 1 3 3 2 Top 33 27 26 27 Gini coefficient (per cent) 52 36 32 36 Source: Office for National Statistics
15:35
Progressive and regressive taxes
• With a progressive tax, the marginal rate of tax rises as income rises. I.e. as people earn more income, the rate of tax on each extra pound goes up. This causes a rise in the average rate of tax
• With a proportional tax, the marginal rate of tax is constant
• With a regressive tax, the rate of tax falls as incomes rise – I.e. the average rate of tax is lower for people of higher incomes
15:35
Data on Taxation and Incomes
Quintile groups of ALL households1
Bottom 2nd 3rd 4th Top
Percentages of gross income
Direct taxes
Income tax 3.5 4.8 8.5 12.1 17.3
Employees' NIC 1.3 2.4 4.0 5.5 5.5
All direct taxes 10.2 11.2 15.9 20.5 24.7
Indirect taxes
VAT 10.3 8.2 7.1 6.3 5.1
Duty on alcohol 1.5 1.1 1.0 0.9 0.7
Duty on tobacco 2.8 1.6 1.5 0.7 0.3
All indirect taxes 26.5 19.8 17.3 14.4 10.8
All taxes 36.6 31.0 33.1 34.9 35.5
Progressive
15:35
Data on Taxation and Incomes
Quintile groups of ALL households1
Bottom 2nd 3rd 4th Top
Percentages of gross income
Direct taxes
Income tax 3.5 4.8 8.5 12.1 17.3
Employees' NIC 1.3 2.4 4.0 5.5 5.5
All direct taxes 10.2 11.2 15.9 20.5 24.7
Indirect taxes
VAT 10.3 8.2 7.1 6.3 5.1
Duty on alcohol 1.5 1.1 1.0 0.9 0.7
Duty on tobacco 2.8 1.6 1.5 0.7 0.3
All indirect taxes 26.5 19.8 17.3 14.4 10.8
All taxes 36.6 31.0 33.1 34.9 35.5
Progressive
Progressive
15:35
Data on Taxation and Incomes
Quintile groups of ALL households1
Bottom 2nd 3rd 4th Top
Percentages of gross income
Direct taxes
Income tax 3.5 4.8 8.5 12.1 17.3
Employees' NIC 1.3 2.4 4.0 5.5 5.5
All direct taxes 10.2 11.2 15.9 20.5 24.7
Indirect taxes
VAT 10.3 8.2 7.1 6.3 5.1
Duty on alcohol 1.5 1.1 1.0 0.9 0.7
Duty on tobacco 2.8 1.6 1.5 0.7 0.3
All indirect taxes 26.5 19.8 17.3 14.4 10.8
All taxes 36.6 31.0 33.1 34.9 35.5
Progressive
Progressive
Regressive
15:35
Data on Taxation and Incomes
Quintile groups of ALL households1
Bottom 2nd 3rd 4th Top
Percentages of gross income
Direct taxes
Income tax 3.5 4.8 8.5 12.1 17.3
Employees' NIC 1.3 2.4 4.0 5.5 5.5
All direct taxes 10.2 11.2 15.9 20.5 24.7
Indirect taxes
VAT 10.3 8.2 7.1 6.3 5.1
Duty on alcohol 1.5 1.1 1.0 0.9 0.7
Duty on tobacco 2.8 1.6 1.5 0.7 0.3
All indirect taxes 26.5 19.8 17.3 14.4 10.8
All taxes 36.6 31.0 33.1 34.9 35.5
Progressive
Progressive
Regressive
Regressive
15:35
Data on Taxation and Incomes
Quintile groups of ALL households1
Bottom 2nd 3rd 4th Top
Percentages of gross income
Direct taxes
Income tax 3.5 4.8 8.5 12.1 17.3
Employees' NIC 1.3 2.4 4.0 5.5 5.5
All direct taxes 10.2 11.2 15.9 20.5 24.7
Indirect taxes
VAT 10.3 8.2 7.1 6.3 5.1
Duty on alcohol 1.5 1.1 1.0 0.9 0.7
Duty on tobacco 2.8 1.6 1.5 0.7 0.3
All indirect taxes 26.5 19.8 17.3 14.4 10.8
All taxes 36.6 31.0 33.1 34.9 35.5
Progressive
Progressive
Regressive
Regressive
Close to being proportional
15:35
Taxation and Aggregate DemandChanges in tax rates and tax allowances can have a direct and indirect effect on the level of aggregate demand
Government spending can be used to manage the level and growth of AD to meet macroeconomic policy objectives such as low inflation and higher levels of employment
When private sector demand for goods and services is low, the government needs to find a compensating source of demand to rebalance the economy – and the solution comes from the government in the form of higher borrowing or less saving.
15:35
Taxation and Aggregate DemandChanges in tax rates and tax allowances can have a direct and indirect effect on the level of aggregate demand – here are some examples
Income tax and disposable income
Corporation taxes and business investment Taxation of imports
National insurance and labour demand
VAT and consumer spending
Taxation and R&D spending
15:35
Taxation and Aggregate DemandChanges in tax rates and tax allowances can have a direct and indirect effect on the level of aggregate demand – here are some examples
Income tax and disposable income
Corporation taxes and business investment Taxation of imports
National insurance and labour demand
VAT and consumer spending
Taxation and R&D spending
15:35
Taxation and Aggregate DemandChanges in tax rates and tax allowances can have a direct and indirect effect on the level of aggregate demand – here are some examples
Income tax and disposable income
Corporation taxes and business investment Taxation of imports
National insurance and labour demand
VAT and consumer spending
Taxation and R&D spending
15:35
Taxation and Aggregate DemandChanges in tax rates and tax allowances can have a direct and indirect effect on the level of aggregate demand – here are some examples
Income tax and disposable income
Corporation taxes and business investment Taxation of imports
National insurance and labour demand
VAT and consumer spending
Taxation and R&D spending
15:35
Taxation and Aggregate DemandChanges in tax rates and tax allowances can have a direct and indirect effect on the level of aggregate demand – here are some examples
Income tax and disposable income
Corporation taxes and business investment Taxation of imports
National insurance and labour demand
VAT and consumer spending
Taxation and R&D spending
15:35
Taxation and Aggregate DemandChanges in tax rates and tax allowances can have a direct and indirect effect on the level of aggregate demand – here are some examples
Income tax and disposable income
Corporation taxes and business investment Taxation of imports
National insurance and labour demand
VAT and consumer spending
Taxation and R&D spending
15:35
Direct tax cuts and ADGeneral
Price Level
Real National Output (Y)
SRAS1
AD1
Y1 Y2
P1P2
Will tax cuts boost demand?
AD2
15:35
Taxation and Aggregate SupplyChanges in tax rates and tax allowances can have a direct and indirect effect on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives Inward migration Capital investment
Enterprise / Entrepreneurship
Human capital spending Tariffs import costs
15:35
Taxation and Aggregate SupplyChanges in tax rates and tax allowances can have a direct and indirect effect on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives Inward migration Capital investment
Enterprise / Entrepreneurship
Human capital spending Tariffs import costs
15:35
Taxation and Aggregate SupplyChanges in tax rates and tax allowances can have a direct and indirect effect on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives Inward migration Capital investment
Enterprise / Entrepreneurship
Human capital spending Tariffs import costs
15:35
Taxation and Aggregate SupplyChanges in tax rates and tax allowances can have a direct and indirect effect on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives Inward migration Capital investment
Enterprise / Entrepreneurship
Human capital spending Tariffs import costs
15:35
Taxation and Aggregate SupplyChanges in tax rates and tax allowances can have a direct and indirect effect on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives Inward migration Capital investment
Enterprise / Entrepreneurship
Human capital spending Tariffs import costs
15:35
Taxation and Aggregate SupplyChanges in tax rates and tax allowances can have a direct and indirect effect on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives Inward migration Capital investment
Enterprise / Entrepreneurship
Human capital spending Tariffs import costs
15:35
Taxation and Research Investment
The UK government has introduced a “patent box”, which provides tax incentives against future profits on drugs developed in the country
Britain’s main corporation tax rate is due to fall to 20 per cent by 2015, from 28 per cent in 2010 – this is a tax on business profits
The patent box offers a 10 per cent tax rate on patent profits
15:35
Taxation and Investment – Shale Gas
"I want Britain to be a leader of the shale gas revolution because it has the potential to create thousands of jobs and keep energy bills low for millions of people."
15:35
Taxation and Housing SupplyIt is widely accepted that there is a chronic shortage of new housing in the UK leading to deep problems of affordability.
The Royal Institute of Chartered Surveyors (RICS) has called upon the Chancellor, George Osborne, to provide VAT incentives to boost house building.
The industry body says that the tax system needs to be used to provide more incentives for the housing development industry, including the provision of VAT for building refurbishment and repair.
Besides a change in VAT, are there other tax changes that might stimulate an expansion in investment in new house-building?
15:35
The Overall UK Tax Burden
The tax burden is measured by total tax revenues measured as a share of GDP
15:35
Selected Indirect Tax Revenues
15:35
To what extent would tax reductions help to bring about stronger growth in the UK economy?
To what extentRequires good evaluationLots of uncertainty at the moment
Evaluate the point you are making in each paragraph!
15:35
To what extent would tax reductions help to bring about stronger growth in the UK economy?
To what extentRequires good evaluationLots of uncertainty at the moment
Tax reductions1/ Which taxes might be cut?2/ Consumer or business taxes?
Evaluate the point you are making in each paragraph!
15:35
To what extent would tax reductions help to bring about stronger growth in the UK economy?
To what extentRequires good evaluationLots of uncertainty at the moment
Tax reductions1/ Which taxes might be cut?2/ Consumer or business taxes?
Stronger growth1/ Context – weak recovery2/ Short term growth?3/ Long term growth? Evaluate the point
you are making in each paragraph!
15:35
To what extent would tax reductions help to bring about stronger growth in the UK economy?
To what extentRequires good evaluationLots of uncertainty at the moment
Tax reductions1/ Which taxes might be cut?2/ Consumer or business taxes?
Stronger growth1/ Context – weak recovery2/ Short term growth?3/ Long term growth?
Different tax cuts for short and long term growth aims?
Evaluate the point you are making in each paragraph!
15:35
To what extent would tax reductions help to bring about stronger growth in the UK economy?
Consumer spending• Cuts in VAT or income tax to boost demand
Business investment• Lower corporation tax to increase investment
Lower employment taxes• Reduced national insurance taxes
Reductions in fuel / carbon taxes• Lower costs for businesses, less inflation
15:35
To what extent would tax reductions help to bring about stronger growth in the UK economy?
Low confidence – tax cuts likely to be saved
Consumer spending• Cuts in VAT or income tax to boost demand
Business investment• Lower corporation tax to increase investment
Lower employment taxes• Reduced national insurance taxes
Reductions in fuel / carbon taxes• Lower costs for businesses, less inflation
15:35
Direct tax cuts and ADGeneral
Price Level
Real National Output (Y)
SRAS1
AD1
Y1 Y2
P1P2
Will tax cuts boost demand?
AD2
15:35
To what extent would tax reductions help to bring about stronger growth in the UK economy?
Low confidence – tax cuts likely to be saved
Businesses might invest overseas instead
Consumer spending• Cuts in VAT or income tax to boost demand
Business investment• Lower corporation tax to increase investment
Lower employment taxes• Reduced national insurance taxes
Reductions in fuel / carbon taxes• Lower costs for businesses, less inflation
15:35
To what extent would tax reductions help to bring about stronger growth in the UK economy?
Low confidence – tax cuts likely to be saved
Businesses might invest overseas instead
Skills shortages limit employment creation
Consumer spending• Cuts in VAT or income tax to boost demand
Business investment• Lower corporation tax to increase investment
Lower employment taxes• Reduced national insurance taxes
Reductions in fuel / carbon taxes• Lower costs for businesses, less inflation
15:35
To what extent would tax reductions help to bring about stronger growth in the UK economy?
Low confidence – tax cuts likely to be saved
Businesses might invest overseas instead
Skills shortages limit employment creation
Consumer spending• Cuts in VAT or income tax to boost demand
Business investment• Lower corporation tax to increase investment
Lower employment taxes• Reduced national insurance taxes
Reductions in fuel / carbon taxes• Lower costs for businesses, less inflation
Conflicts with environmental policies
15:36
Lower taxes for businessesGeneral
Price Level
Real National Output (Y)
SRAS1
AD1
Y1 Y2
P1
P2
SRAS2
15:36
Can tax changes drive LRAS higher?General
Price Level
Real National Output (Y)
SRAS1
Y1 Y2
P1
LRAS1 LRAS2
AD1
AD2
Y3
15:36
Good evaluation approaches
Evaluate the point you are making in each paragraph!
Tax cuts on their own are insufficient in the current UK economic context
Which tax cuts will boost short term growth?
Which tax changes might help long term competitiveness?
Consequences for other macro objectives?
15:36
Good evaluation approaches
Evaluate the point you are making in each paragraph!
Tax cuts on their own are insufficient in the current UK economic context
Which tax cuts will boost short term growth?
Which tax changes might help long term competitiveness?
Consequences for other macro objectives?
15:36
Good evaluation approaches
Evaluate the point you are making in each paragraph!
Tax cuts on their own are insufficient in the current UK economic context
Which tax cuts will boost short term growth?
Which tax changes might help long term competitiveness?
Consequences for other macro objectives?
15:36
Good evaluation approaches
Evaluate the point you are making in each paragraph!
Tax cuts on their own are insufficient in the current UK economic context
Which tax cuts will boost short term growth?
Which tax changes might help long term competitiveness?
Consequences for other macro objectives?
AS Macro Course Support
Get help from fellow students, teachers and tutor2u on Twitter:
#econ2@tutor2u@tutor2u-econ
15:36
Economics of Government Spending
Welfare Spending
Transfer Payments
Public Services
Recurring spending (G)
Public Sector Capital Spending
Investment
15:36
Economics of Government Spending
Welfare Spending
Transfer Payments
Public Services
Recurring spending (G)
Public Sector Capital Spending
Investment
15:36
Economics of Government Spending
Welfare Spending
Transfer Payments
Public Services
Recurring spending (G)
Public Sector Capital Spending
Investment
15:36
Economics of Government Spending
Welfare Spending
Transfer Payments
Public Services
Recurring spending (G)
Public Sector Capital Spending
Investment
• Total public (government) spending in the UK will be £745 billion in 2015/16 • This is 43.1% of GDP• £50 billion or 7% will be capital spending
15:36
Main UK Departmental Spending (2013)Department £ billion
Work and Pensions 167,828
NHS (Health) 117,112
Education 66,954
Defence 37,338
Transport 17,043
Home Office 16,188
Communities and Local Government 15,410
Environment, Food and Rural Affairs 10,757
Culture, Media and Sport 9,519
Justice 8,505
International Development 5,923
Cabinet Office 5,722
Energy and Climate Change 3,141
Source: https://www.gov.uk/government/publications/public-expenditure-statistical-analyses-2013
15:36
Main UK Departmental Spending (2013)Department £ billion
Work and Pensions 167,828 Welfare spending
NHS (Health) 117,112
Education 66,954 State education
Defence 37,338
Transport 17,043
Home Office 16,188 Prisons, Policing etc.
Communities and Local Government 15,410
Environment, Food and Rural Affairs 10,757
Culture, Media and Sport 9,519
Justice 8,505 Legal system
International Development 5,923 Includes overseas aid
Cabinet Office 5,722
Energy and Climate Change 3,141
Source: https://www.gov.uk/government/publications/public-expenditure-statistical-analyses-2013
15:36
Welfare Benefits
Cash welfare benefits in 2012 were worth an average of:
£7,419 for each family in the bottom 20% of the UK income distribution
• Welfare benefits provide a safety-net for people/families on low incomes• Some benefits are universal whereas others are means-tested (linked to income)
Welfare CapIn 2010 the Government announced an intention to cap total household benefits at £500 per week for a family and £350 per week for a single person with no children from April 2013 (implementation was subsequently delayed)
15:36
Economic Importance of Government Spending
Component of
aggregate demand
Regional economic
impact
Essential public goods
Achieving more
equity in society
15:36
Economic Importance of Government Spending
Component of
aggregate demand
Regional economic
impact
Essential public goods
Achieving more
equity in society
15:36
Economic Importance of Government Spending
Component of
aggregate demand
Regional economic
impact
Essential public goods
Achieving more
equity in society
15:36
Economic Importance of Government Spending
Component of
aggregate demand
Regional economic
impact
Essential public goods
Achieving more
equity in society
15:36
Government spending as % of GDPIs there an optimum size of government spending for an economy such as the UK?
“We are sticking to the task. But that doesn't just mean making difficult decisions on public spending. It also means something more profound. It means building a leaner, more efficient state. We need to do more with less. Not just now, but permanently” David Cameron, November 2013
15:36
Government spending in real termsThe boom years for rising state spending have come to an end – the Coalition government have introduced a period of fiscal austerity with cuts in government spending planned
15:36
“If we don't get a grip on government spending, there will be no growth.”
George Osborne, 2011
15:36
“If we don't get a grip on government spending, there will be no growth.”
George Osborne, 2011
“The danger of having no growth, or little growth, for a long time is high; you get a number of vicious cycles which come into play…You're playing with fire when you get to low growth rates”
15:36
Government spending and taxation
15:36
Discuss the effectiveness of cuts in government spending as a means of meeting the
government’s macroeconomic objectives
• Scrapping investment projects – job losses, impact on potential GDP, negative multiplier effects
Argument 1: Depends on where cuts are made
• Will other components of AD help to compensate? E.g. Exports? Consumer spending?
Argument 2: Depends on how deep cuts are
• Euro economy is in crisis? • Government has already lost AAA credit rating despite cuts
in government spending
Argument 3: Depends on external economic events
15:36
Discuss the effectiveness of cuts in government spending as a means of meeting the
government’s macroeconomic objectives
• Scrapping investment projects – job losses, impact on potential GDP, negative multiplier effects
Argument 1: Depends on where cuts are made
• Will other components of AD help to compensate? E.g. Exports? Consumer spending?
Argument 2: Depends on how deep cuts are
• Euro economy is in crisis? • Government has already lost AAA credit rating despite cuts
in government spending
Argument 3: Depends on external economic events
15:36
Government Spending and JobsWhat are the possible relationships between the rate of unemployment and the level of government spending?
15:36
Discuss the effectiveness of cuts in government spending as a means of meeting the
government’s macroeconomic objectives
• Scrapping investment projects – job losses, impact on potential GDP, negative multiplier effects
Argument 1: Depends on where cuts are made
• Will other components of AD help to compensate? E.g. Exports? Consumer spending?
Argument 2: Depends on how deep cuts are
• Euro economy is in crisis? • Government has already lost AAA credit rating despite cuts
in government spending
Argument 3: Depends on external economic events
AS Macro Course Support
Get help from fellow students, teachers and tutor2u on Twitter:
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15:36
Recession and the Fiscal Deficit
• Global financial crisis + deep recession large fall in tax revenues
• Higher government spending
• Huge rise in fiscal deficit
• UK already had a deficit before the recession
G
T
15:36
The Economics of Budget Deficits
15:36
Government borrowingThe budget deficit is the amount that the government needs to borrow each year to finance state spending
15:36
The case for budget deficit reduction
• High debt threatens stability and recovery
• Government wants credibility in financial markets
• Higher future taxes will squeeze the private sector
• Inequitable to leave future generations with debt
• Doubts about effectiveness of stimulus policies
15:36
Deficits and Debt
15:36
On average, the loans used to finance Britain’s national debt run for ten years.
When bonds expire, the Treasury has to raise more money at the interest rate demanded by international markets
Borrowing Money – Bond Yields for the UK
15:36
UK Government Bond YieldsBond yield: the annual interest rate on debt
15:36
Counter-arguments to fiscal austerity
• UK should take advantage of low interest rates to fund crucial infrastructure
• Economy remains depressed and unemployment is high. Spending needed to create jobs
• Sensible fiscal stimulus policies are self-financing – they create extra tax revenue
• Poor households and families with children will bear the brunt of austerity – it is making inequality worse
15:36
Debt Interest PaymentsIn 2011, the UK government was spending near £1 billion each week in debt interest payments
15:36
Resources for revision (click to access)
AS Macro Course Support
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