Government fiscal policy and the economy
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Government fiscal policy and the economy

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Updated (20123) revision presentation on aspects of fiscal policy - designed for student and teachers taking the AS macro paper.

Updated (20123) revision presentation on aspects of fiscal policy - designed for student and teachers taking the AS macro paper.

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Government fiscal policy and the economy Government fiscal policy and the economy Presentation Transcript

  • Fiscal Policy and the Economy AS Macro – Autumn 2013 08:04
  • 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) 08:04
  • Some key roles for fiscal policy Financing key areas of government spending Providing a welfare state safety-net for families Managing the macroeconomic cycle 08:04 Altering the distribution of income and wealth Improving country’s competitiveness Tackle market failures through intervention
  • Some key roles for fiscal policy Financing key areas of government spending Providing a welfare state safety-net for families Managing the macroeconomic cycle 08:04 Altering the distribution of income and wealth Improving country’s competitiveness Tackle market failures through intervention
  • Some key roles for fiscal policy Financing key areas of government spending Providing a welfare state safety-net for families Managing the macroeconomic cycle 08:04 Altering the distribution of income and wealth Improving country’s competitiveness Tackle market failures through intervention
  • Some key roles for fiscal policy Financing key areas of government spending Providing a welfare state safety-net for families Managing the macroeconomic cycle 08:04 Altering the distribution of income and wealth Improving country’s competitiveness Tackle market failures through intervention
  • Some key roles for fiscal policy Financing key areas of government spending Providing a welfare state safety-net for families Managing the macroeconomic cycle 08:04 Altering the distribution of income and wealth Improving country’s competitiveness Tackle market failures through intervention
  • Some key roles for fiscal policy Financing key areas of government spending Providing a welfare state safety-net for families Managing the macroeconomic cycle 08:04 Altering the distribution of income and wealth Improving country’s competitiveness Tackle market failures through intervention
  • 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 08:04
  • Micro recap – indirect taxes! A specific tax when demand is elastic An ad valorem tax when demand is inelastic S + Tax Price Price S + Tax S1 S1 P2 P2 P1 D1 P1 D1 Q2 08:04 Q1 Qty Q2 Q1 Quantity
  • Micro recap – indirect taxes! A specific tax when demand is elastic An ad valorem tax when demand is inelastic S + Tax Price Price S + Tax S1 S1 P2 P2 P1 D1 P1 D1 Q2 08:04 Q1 Quantity Q2 Q1 Quantity
  • 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 08:04
  • 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 08:04
  • Tax Knowledge! Tax Income tax Basic rate Higher rate Additional rate VAT 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) 08:04 Tax rate (%, or level)
  • Tax Knowledge! Tax Tax rate (%, or level) Income tax Basic rate Higher rate Additional rate 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) 08:04 20% 40% 45% £4.52
  • Income Tax Component 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. 08:04
  • 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. 08:04
  • The main tax revenues for the UK There was a sustained rise in tax revenues during the long boom for the UK economy Recession and slow recovery has hit tax receipts 08:04
  • How taxes and benefits affect the distribution of income Average income per household (£ per year) Quintile groups 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 Net position 10 387 9 561 4 580 -8 743 -4 469 -20 958 Source: Office for National Statistics 08:04
  • Taxes, welfare and income inequality Percentage shares of income for ALL households in 2012 Original income Quintile group Bottom 2nd 3rd 4th Top All households Decile group Bottom Top Gini coefficient (per cent) 08:04 Gross income Disposable income Post-tax income 3 7 14 24 51 100 7 11 16 23 43 100 8 13 17 22 41 100 7 12 16 22 42 100 1 33 3 27 3 26 2 27 52 36 32 36 Source: Office for National Statistics
  • 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 08:04
  • Data on Taxation and Incomes Quintile groups of ALL households1 Bottom 2nd 3rd 4th Top 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 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 Percentages of gross income Direct taxes Indirect taxes 08:04 Progressive
  • Data on Taxation and Incomes Quintile groups of ALL households1 Bottom 2nd 3rd 4th Top 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 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 Percentages of gross income Direct taxes Indirect taxes 08:04 Progressive Progressive
  • Data on Taxation and Incomes Quintile groups of ALL households1 Bottom 2nd 3rd 4th Top 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 Progressive VAT 10.3 8.2 7.1 6.3 5.1 Regressive 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 Percentages of gross income Direct taxes Progressive Indirect taxes 08:04
  • Data on Taxation and Incomes Quintile groups of ALL households1 Bottom 2nd 3rd 4th Top 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 Progressive VAT 10.3 8.2 7.1 6.3 5.1 Regressive 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 Percentages of gross income Direct taxes Progressive Indirect taxes 08:04 Regressive
  • Data on Taxation and Incomes Quintile groups of ALL households1 Bottom 2nd 3rd 4th Top 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 Progressive VAT 10.3 8.2 7.1 6.3 5.1 Regressive 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 Percentages of gross income Direct taxes Progressive Indirect taxes 08:04 Regressive Close to being proportional
  • Taxation and Aggregate Demand Changes 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. 08:04
  • Taxation and Aggregate Demand Changes 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 Taxation of imports National insurance and labour demand 08:04 Corporation taxes and business investment VAT and consumer spending Taxation and R&D spending
  • Taxation and Aggregate Demand Changes 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 Taxation of imports National insurance and labour demand 08:04 Corporation taxes and business investment VAT and consumer spending Taxation and R&D spending
  • Taxation and Aggregate Demand Changes 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 Taxation of imports National insurance and labour demand 08:04 Corporation taxes and business investment VAT and consumer spending Taxation and R&D spending
  • Taxation and Aggregate Demand Changes 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 Taxation of imports National insurance and labour demand 08:04 Corporation taxes and business investment VAT and consumer spending Taxation and R&D spending
  • Taxation and Aggregate Demand Changes 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 Taxation of imports National insurance and labour demand 08:04 Corporation taxes and business investment VAT and consumer spending Taxation and R&D spending
  • Taxation and Aggregate Demand Changes 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 Taxation of imports National insurance and labour demand 08:04 Corporation taxes and business investment VAT and consumer spending Taxation and R&D spending
  • Will tax cuts boost demand? Direct tax cuts and AD General Price Level SRAS1 P2 P1 AD1 Y1 08:04 Y2 AD2 Real National Output (Y)
  • Taxation and Aggregate Supply Changes 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 Capital investment Enterprise / Entrepreneurship 08:04 Inward migration Human capital spending Tariffs import costs
  • Taxation and Aggregate Supply Changes 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 Capital investment Enterprise / Entrepreneurship 08:04 Inward migration Human capital spending Tariffs import costs
  • Taxation and Aggregate Supply Changes 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 Capital investment Enterprise / Entrepreneurship 08:04 Inward migration Human capital spending Tariffs import costs
  • Taxation and Aggregate Supply Changes 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 Capital investment Enterprise / Entrepreneurship 08:04 Inward migration Human capital spending Tariffs import costs
  • Taxation and Aggregate Supply Changes 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 Capital investment Enterprise / Entrepreneurship 08:04 Inward migration Human capital spending Tariffs import costs
  • Taxation and Aggregate Supply Changes 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 Capital investment Enterprise / Entrepreneurship 08:04 Inward migration Human capital spending Tariffs import costs
  • Taxation and Research Investment The patent box offers a 10 per cent tax rate on patent profits 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 08:04
  • 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." 08:04
  • Taxation and Housing Supply It 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. Besides a change in VAT, are there other tax changes that might stimulate an expansion in investment in new house-building? 08:04 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.
  • The Overall UK Tax Burden The tax burden is measured by total tax revenues measured as a share of GDP 08:04
  • Selected Indirect Tax Revenues 08:04
  • To what extent would tax reductions help to bring about stronger growth in the UK economy? To what extent Requires good evaluation Lots of uncertainty at the moment Evaluate the point you are making in each paragraph! 08:04
  • To what extent would tax reductions help to bring about stronger growth in the UK economy? To what extent Requires good evaluation Lots of uncertainty at the moment Tax reductions 1/ Which taxes might be cut? 2/ Consumer or business taxes? Evaluate the point you are making in each paragraph! 08:04
  • To what extent would tax reductions help to bring about stronger growth in the UK economy? To what extent Requires good evaluation Lots of uncertainty at the moment Tax reductions 1/ Which taxes might be cut? 2/ Consumer or business taxes? Stronger growth 1/ Context – weak recovery 2/ Short term growth? 3/ Long term growth? 08:04 Evaluate the point you are making in each paragraph!
  • To what extent would tax reductions help to bring about stronger growth in the UK economy? To what extent Requires good evaluation Lots of uncertainty at the moment Tax reductions 1/ Which taxes might be cut? 2/ Consumer or business taxes? Stronger growth 1/ Context – weak recovery 2/ Short term growth? 3/ Long term growth? Different tax cuts for short and long term growth aims? 08:04 Evaluate the point you are making in each paragraph!
  • 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 08:04
  • 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 08:04 Low confidence – tax cuts likely to be saved
  • Will tax cuts boost demand? Direct tax cuts and AD General Price Level SRAS1 P2 P1 AD1 Y1 08:04 Y2 AD2 Real National Output (Y)
  • 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 08:04 Low confidence – tax cuts likely to be saved Businesses might invest overseas instead
  • 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 08:04 Low confidence – tax cuts likely to be saved Businesses might invest overseas instead Skills shortages limit employment creation
  • 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 08:04 Low confidence – tax cuts likely to be saved Businesses might invest overseas instead Skills shortages limit employment creation Conflicts with environmental policies
  • Lower taxes for businesses General Price Level SRAS1 SRAS2 P1 P2 AD1 Y1 Y2 08:04 Real National Output (Y)
  • Can tax changes drive LRAS higher? LRAS1 LRAS2 General Price Level SRAS1 P1 AD2 AD1 Real National Output (Y) 08:04 Y1 Y2 Y3
  • Good evaluation approaches 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? 08:04 Evaluate the point you are making in each paragraph!
  • Good evaluation approaches 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? 08:04 Evaluate the point you are making in each paragraph!
  • Good evaluation approaches 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? 08:04 Evaluate the point you are making in each paragraph!
  • Good evaluation approaches 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? 08:04 Evaluate the point you are making in each paragraph!
  • AS Macro Course Support Get help from fellow students, teachers and tutor2u on Twitter: #econ2 @tutor2u @tutor2u-econ
  • Economics of Government Spending Transfer Payments Investment Welfare Spending 08:04 Recurring spending (G) Public Services Public Sector Capital Spending
  • Economics of Government Spending Transfer Payments Investment Welfare Spending 08:04 Recurring spending (G) Public Services Public Sector Capital Spending
  • Economics of Government Spending Transfer Payments Investment Welfare Spending 08:04 Recurring spending (G) Public Services Public Sector Capital Spending
  • Economics of Government Spending Transfer Payments Recurring spending (G) Investment Welfare Spending Public Services Public Sector Capital Spending • 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 08:04
  • 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 08:04 3,141 Source: https://www.gov.uk/government/publications/publicexpenditure-statistical-analyses-2013
  • 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 Legal system International Development 5,923 Includes overseas aid Cabinet Office 5,722 Energy and Climate Change 3,141 08:04 Welfare spending State education Prisons, Policing etc. Source: https://www.gov.uk/government/publications/publicexpenditure-statistical-analyses-2013
  • Welfare Benefits • Welfare benefits provide a safety-net for people/families on low incomes • Some benefits are universal whereas others are means-tested (linked to income) 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 Cap In 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) 08:04
  • Economic Importance of Government Spending Component of aggregate demand Essential public goods 08:04 Regional economic impact Achieving more equity in society
  • Economic Importance of Government Spending Component of aggregate demand Essential public goods 08:04 Regional economic impact Achieving more equity in society
  • Economic Importance of Government Spending Component of aggregate demand Essential public goods 08:04 Regional economic impact Achieving more equity in society
  • Economic Importance of Government Spending Component of aggregate demand Essential public goods 08:04 Regional economic impact Achieving more equity in society
  • Government spending as % of GDP Is 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 08:04
  • Government spending in real terms The 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 08:04
  • “If we don't get a grip on government spending, there will be no growth.” George Osborne, 2011 08:04
  • “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” 08:04
  • Government spending and taxation 08:04
  • Discuss the effectiveness of cuts in government spending as a means of meeting the government’s macroeconomic objectives Argument 1: Depends on where cuts are made • Scrapping investment projects – job losses, impact on potential GDP, negative multiplier effects Argument 2: Depends on how deep cuts are • Will other components of AD help to compensate? E.g. Exports? Consumer spending? Argument 3: Depends on external economic events • Euro economy is in crisis? • Government has already lost AAA credit rating despite cuts in government spending 08:04
  • Discuss the effectiveness of cuts in government spending as a means of meeting the government’s macroeconomic objectives Argument 1: Depends on where cuts are made • Scrapping investment projects – job losses, impact on potential GDP, negative multiplier effects Argument 2: Depends on how deep cuts are • Will other components of AD help to compensate? E.g. Exports? Consumer spending? Argument 3: Depends on external economic events • Euro economy is in crisis? • Government has already lost AAA credit rating despite cuts in government spending 08:04
  • Government Spending and Jobs What are the possible relationships between the rate of unemployment and the level of government spending? 08:04
  • Discuss the effectiveness of cuts in government spending as a means of meeting the government’s macroeconomic objectives Argument 1: Depends on where cuts are made • Scrapping investment projects – job losses, impact on potential GDP, negative multiplier effects Argument 2: Depends on how deep cuts are • Will other components of AD help to compensate? E.g. Exports? Consumer spending? Argument 3: Depends on external economic events • Euro economy is in crisis? • Government has already lost AAA credit rating despite cuts in government spending 08:04
  • AS Macro Course Support Get help from fellow students, teachers and tutor2u on Twitter: #econ2 @tutor2u @tutor2u-econ
  • Recession and the Fiscal Deficit • Global financial crisis + deep recession  large fall in tax revenues T • Higher government spending • Huge rise in fiscal deficit • UK already had a deficit before the recession 08:04 G
  • The Economics of Budget Deficits 08:04
  • Government borrowing The budget deficit is the amount that the government needs to borrow each year to finance state spending 08:04
  • 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 08:04
  • Deficits and Debt 08:04
  • Borrowing Money – Bond Yields for the UK 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 08:04
  • UK Government Bond Yields Bond yield: the annual interest rate on debt 08:04
  • 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 08:04
  • Debt Interest Payments In 2011, the UK government was spending near £1 billion each week in debt interest payments 08:04
  • Resources for revision (click to access) 08:04
  • AS Macro Course Support Get help from fellow students, teachers and tutor2u on Twitter: #econ2 @tutor2u @tutor2u-econ