Fiscal Policy


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Information on Fiscal Policy including that of the impact on AD and the Economics Objectives or Inflation, Economic Growth, Unemployment and Balance of Payments

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Fiscal Policy

  1. 1. Fiscal Policy Manipulation of GovernmentSpending and Taxation to achieve Macro Economic Goals
  2. 2. Basics of Fiscal Policy• Is all about Government Spending & Taxation• Announced in the Budget and Autumn Statements by the Chancellor
  3. 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. 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. 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. 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
  7. 7. AD & Deflationary Policy AD1
  8. 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
  9. 9. AD & Reflationary Policy AD1
  10. 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. 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. 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. 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