Information on Fiscal Policy including that of the impact on AD and the Economics Objectives or Inflation, Economic Growth, Unemployment and Balance of Payments
social pharmacy d-pharm 1st year by Pragati K. Mahajan
Fiscal Policy
1. Fiscal Policy
Manipulation of Government
Spending and Taxation to achieve
Macro Economic Goals
2. Basics of Fiscal Policy
• Is all about Government Spending &
Taxation
• Announced in the Budget and Autumn
Statements by the Chancellor
3. Government Spending
• This is expenditure by the government on
this things we need as a state such as
defence or education.
• Makes up the G in Aggregate Demand
4. Taxation
• Many Different Forms of Taxation in the
UK
• Indirect Taxes: Taxes that affect everyone
such as VAT
• Direct Taxes, which include Income Tax
• There is also Corporation Tax, Stamp
Duties and all other forms of Tax
available
5. Government Budget Deficits
• A deficit is where spending is above the
total revenue.
• The opposite to this is a Surplus.
• At the moment we have a budget deficit
and this is financed through borrowing
adding to our national debt
Current UK National Debt (May 2012):
£1,042,842,006,054
One Trillion, forty two billion, eight hundred and forty two million six
thousand and fifty four pounds
6. Fiscal Policy & Inflation
• If Demand Pill inflation is existence then
a government would look to reduce
Aggregate Demand
• This is called a deflationary fiscal
policy
• This is done by using tax rises which will
shift the AD Curve to the Left
8. Fiscal Policy & Unemployment
• Reflationary Policies can be used to reduce
Unemployment
• Cutting Taxes or raising spending will help
with this
• If a government cut taxes people have more
disposable income so therefore spend more
which increased Consumption and then AD.
• This would shift the curve to the right
• However prices would rise
10. Fiscal Policy & Economic Growth
• Short Run
– If there is unemployed resources, output can
be increased until all resources are fully
employed
• Long Run
– In order to have Long Run Growth AS needs to
be increased by investing in Education and
Health
11. Fiscal Policy & Balance of
Payments
• Two Options
• Expenditure Reducing
– Cutting Govt. Spending and raising taxes to
reduce AD. This reduced imports which will
improve the trade balance
• Expenditure Switching
– This encourages UK consumers to switch from
Imports to domestic products through tariffs
on foreign goods
– Govt. spends on encouraging UK Exports
12. Advantages of Fiscal Policy
• Can have a significant impact on the
Economy
• Can be discriminating which allows
different regions or consumption habits
to prosper
• Makes the distribution of income fairer
through progressive taxes and benefits
13. Disadvantages of Fiscal Policy
• Can have effects on other areas which
were not originally intended
– E.g. Fall in taxes may hope to boost
consumption but end up with consumers
sucking in Imports
• Time Lag is huge on Fiscal Policy
• Some policy e.g. High Taxes may be a
disincentive to work