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

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

7. AD & Deflationary Policy
AD1

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. AD & Reflationary Policy
AD1

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