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AS Macro-Economics - March 2015
AS Macro-Economics Revision Workshop
March 2015
Session 3:
Aspects of Fiscal Policy
Geoff ...
AS Macro-Economics - March 2015
AS Macro-Economics Revision Workshop
March 2015
Revision Support
Geoff Riley @tutor2u_econ...
AS Macro-Economics - March 2015
Linda Yueh
@lindayueh
Robert Peston
@Peston
Kamal Ahmed
@BBCkamal
Keep following the busin...
AS Macro-Economics - March 2015
Page 22
Fiscal policy is the use of…..
Government
Spending
Taxation
Government
Borrowing
AS Macro-Economics - March 2015
Page 22
Fiscal policy is used to influence aggregate
demand and aggregate supply to achiev...
AS Macro-Economics - March 2015
AS Macro-Economics - March 2015
£7 per second
AS Macro-Economics - March 2015
Page 22
Inflation is currently relatively low (<1%) but has
exceeded the upper levels of t...
AS Macro-Economics - March 2015
Page 22
Policy
suggestion 1
Policy
suggestion 2
Policy
suggestion 3
Fiscal austerity –
i.e...
AS Macro-Economics - March 2015
Page 23
Taxation:
AS Macro-Economics - March 2015
Weak growth of tax revenues
• Falling real wages for many people in work
• Rise in part ti...
AS Macro-Economics - March 2015
Page 24
Key taxation changes made in the Budget 2015
• Rise in the income tax free allowan...
AS Macro-Economics - March 2015
Income Tax – The Basics
• Personal tax free allowance £10,600
• Basic rate of income tax 2...
AS Macro-Economics - March 2015
Page 24
Analysis:
If the income tax free allowance is rising why do we expect the
governme...
AS Macro-Economics - March 2015
Original income and Final income by quintile
groups for ALL households, 2012/13
Page 24
Th...
AS Macro-Economics - March 2015
Welfare benefits – the basics
• State pension £115.93
• Child benefit £20.70 for 1st child...
AS Macro-Economics - March 2015
Does this redistribution of income lead to an
increase in aggregate demand? Argument for…
...
AS Macro-Economics - March 2015
Does this redistribution of income lead to an
increase in aggregate demand? Argument again...
AS Macro-Economics - March 2015
The Government needs to borrow because its
spending outstrips its revenue. This has been
t...
AS Macro-Economics - March 2015
AS Macro-Economics - March 2015
• Fiscal conservatives argue that strong action is needed to lower the
budget deficit
1. L...
AS Macro-Economics - March 2015
Keynesian economists favour the active use of fiscal policy as the
may way of managing dem...
AS Macro-Economics - March 2015
Possible impacts of deep cuts in state spending
Page 26
Impact 1 Impact 2 Impact 3
Jobs
Hi...
AS Macro-Economics - March 2015
Despite austerity to cut the deficit, the Government has
continued to increase spending. W...
AS Macro-Economics - March 2015
Examples of UK infrastructure projects
• 2nd Forth Road Bridge
• Cross Rail and High Speed...
AS Macro-Economics - March 2015
Examples of UK infrastructure projects
• 2nd Forth Road Bridge in Scotland
• 1,400 new flo...
AS Macro-Economics - March 2015
Linda Yueh
@lindayueh
Robert Peston
@Peston
Kamal Ahmed
@BBCkamal
Keep following the busin...
AS Macro-Economics - March 2015
Key Takeaway Points
• Fiscal policy affects both aggregate demand
and aggregate supply (re...
AS Macro-Economics - March 2015
Get help from fellow
students, teachers and
tutor2u on Twitter:
@tutor2u_econ
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AS Macroeconomics - Aspects of UK Fiscal Policy

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AS Macroeconomics - Aspects of UK Fiscal Policy

  1. 1. AS Macro-Economics - March 2015 AS Macro-Economics Revision Workshop March 2015 Session 3: Aspects of Fiscal Policy Geoff Riley Page
  2. 2. AS Macro-Economics - March 2015 AS Macro-Economics Revision Workshop March 2015 Revision Support Geoff Riley @tutor2u_econ Website: www.beta.tutor2u.net Page 3
  3. 3. AS Macro-Economics - March 2015 Linda Yueh @lindayueh Robert Peston @Peston Kamal Ahmed @BBCkamal Keep following the business and economics news as part of your revision!
  4. 4. AS Macro-Economics - March 2015 Page 22 Fiscal policy is the use of….. Government Spending Taxation Government Borrowing
  5. 5. AS Macro-Economics - March 2015 Page 22 Fiscal policy is used to influence aggregate demand and aggregate supply to achieve the main macro objectives of: Stable Low Inflation High employment or Low Unemployment Sustainable Economic Growth Sustainable Balance of Payments
  6. 6. AS Macro-Economics - March 2015
  7. 7. AS Macro-Economics - March 2015 £7 per second
  8. 8. AS Macro-Economics - March 2015 Page 22 Inflation is currently relatively low (<1%) but has exceeded the upper levels of the government’s 2% target in recent years. You have 2 minutes to suggest 3 possible fiscal policies that could be uses to keep inflation close to the 2% mark if it were too high
  9. 9. AS Macro-Economics - March 2015 Page 22 Policy suggestion 1 Policy suggestion 2 Policy suggestion 3 Fiscal austerity – i.e. increase income tax – reduce consumer spending to put downward pressure on prices Lower the rate of VAT or freeze the level of duties on fuel / alcohol / tobacco Cut pollution taxes Invest in infrastructure – to boost nation’s productive capacity and productivity Lost real GDP from contracting demand Environmental objectives conflicted Long time lags to take full effect
  10. 10. AS Macro-Economics - March 2015 Page 23 Taxation:
  11. 11. AS Macro-Economics - March 2015 Weak growth of tax revenues • Falling real wages for many people in work • Rise in part time employment • Corporate tax avoidance • Low inflation – hits revenue from indirect taxes such as VAT
  12. 12. AS Macro-Economics - March 2015 Page 24 Key taxation changes made in the Budget 2015 • Rise in the income tax free allowance to £10,600 • Diverted profits tax (Google Tax) to take effect • Rise in the bank levy on bank balance sheets • 1st £1000 of interest on savings now free of tax • £13bn of infrastructure investment for the North
  13. 13. AS Macro-Economics - March 2015 Income Tax – The Basics • Personal tax free allowance £10,600 • Basic rate of income tax 20% • 40% rate of income tax on gross incomes above £41,185 • 45% rate of income tax on gross incomes above £150,000 Tax allowances have become an important part of the fiscal policy debate – please be aware of this in your AS macro revision
  14. 14. AS Macro-Economics - March 2015 Page 24 Analysis: If the income tax free allowance is rising why do we expect the government income from direct taxation to increase? Reason 1 Reason 2 Reducing direct tax incentivises work – some people will increase hours of work to boost their post-tax income Keeping more income reduces the incentive to evade or avoid taxation. More declaration of earnings will be made & tax revenues will grow Evaluation: Consider different ways to improve incentives for lower paid workers – i.e. larger tax allowances, a higher minimum wage / living wage or supply-side policies to boost skills and create more higher paid jobs?
  15. 15. AS Macro-Economics - March 2015 Original income and Final income by quintile groups for ALL households, 2012/13 Page 24 The tax and welfare system is progressive – lowering the income and wealth gap
  16. 16. AS Macro-Economics - March 2015 Welfare benefits – the basics • State pension £115.93 • Child benefit £20.70 for 1st child • £13.70 for other children • Household benefit cap: Limits total household benefits at £500 per week for a family and £350 per week for a single person with no children
  17. 17. AS Macro-Economics - March 2015 Does this redistribution of income lead to an increase in aggregate demand? Argument for… Page 25 Point Explanation Evidence/ Example Evaluation Lower earners will receive more in welfare benefits Redistribution of income leads to increase in earnings for poorer families enabling them to increase their demand and consumption New ‘Universal Credit’ is a mechanism for giving welfare payments to those who fall below a certain income threshold Will the extra demand of poorer outweigh the reduced consumption of the wealthier?
  18. 18. AS Macro-Economics - March 2015 Does this redistribution of income lead to an increase in aggregate demand? Argument against… Page 25 Point Explanation Evidence Evaluation Higher tax rates incentivises wealth-creators to move to countries with relatively lower taxation Those with higher incomes have a greater capacity to live and work in foreign countries with lower taxation, consuming less in the UK as a result Formula 1 Racing World Champion, Lewis Hamilton, is a tax exile (a resident of Switzerland) Tax revenues from the richest are an important source of government revenue – the richest 1% pay 27% of total income tax revenues each year
  19. 19. AS Macro-Economics - March 2015 The Government needs to borrow because its spending outstrips its revenue. This has been the case since 2001. However, both major political parties have pledged to move the budget from deficit to a small surplus by the end of the decade. The majority of deficit reduction is coming from real cuts in government spending Page 26
  20. 20. AS Macro-Economics - March 2015
  21. 21. AS Macro-Economics - March 2015 • Fiscal conservatives argue that strong action is needed to lower the budget deficit 1. Lower borrowing means that the UK will keep a high credit rating - this will mean lower interest rates on government debt 2. Less interest paid on debt frees up money for key public services such as health, transport or education 3. Reducing debt opens up the possibility of tax cuts – thereby stimulating growth in the private sector 4. Tighter control of government spending means that the Bank of England can keep their policy interest rates low for a longer period of time (this point is good for linking monetary and fiscal policy)
  22. 22. AS Macro-Economics - March 2015 Keynesian economists favour the active use of fiscal policy as the may way of managing demand and economic activity Counter cyclical policies Targeted direct and indirect tax changes Higher government capital spending Government borrowing can pay for itself Active measures needed to inject extra demand can drag the economy out of a recession Tax cuts for lower income groups with higher propensity to spend boosts AD Depending on the size of the fiscal multiplier – borrowing will create more tax revenues Keynesians favour labour-intensive projects e.g. transport infrastructure and new housing
  23. 23. AS Macro-Economics - March 2015 Possible impacts of deep cuts in state spending Page 26 Impact 1 Impact 2 Impact 3 Jobs Higher unemployment – many public sector areas (e.g. armed forces, local authorities) have seen many redundancies Public services Lower standard and quantity of public and merit goods such as education and local authority services Economic growth Negative multiplier effects e.g. many private sector jobs depend on public sector demand
  24. 24. AS Macro-Economics - March 2015 Despite austerity to cut the deficit, the Government has continued to increase spending. Why? Page 27 Improve Productivity Improve Infrastructure Increase investment Increased spending on the Youth Contract which includes a big expansion of apprenticeships Earmarked funds and proposals for HS2 are in advanced stages + plans for East-West transport links Creation of many more ‘Enterprize Zones’ in UK – funding designed to attract inward investment
  25. 25. AS Macro-Economics - March 2015 Examples of UK infrastructure projects • 2nd Forth Road Bridge • Cross Rail and High Speed Rail project (HS2) • London Gateway Port & new London super sewer • Nuclear power plants including Hinkley Point Economic significance of infrastructure • Potentially high multiplier effects from multi- billion investment projects – boosts AD and jobs • Lack of infrastructure may discourage FDI • Increases the capital stock / productive potential
  26. 26. AS Macro-Economics - March 2015 Examples of UK infrastructure projects • 2nd Forth Road Bridge in Scotland • 1,400 new flood defence projects • Cross Rail and High Speed Rail project (HS2) • London Gateway Port & new London super sewer • Nuclear power plants including Hinkley Point Economic significance of infrastructure • Potentially high multiplier effects from multi-billion investment projects – boosts AD and jobs • Lack of infrastructure may discourage FDI • Increases the capital stock / productive potential • Reminder that fiscal policy affects AD and LRAS!
  27. 27. AS Macro-Economics - March 2015 Linda Yueh @lindayueh Robert Peston @Peston Kamal Ahmed @BBCkamal Keep following the business and economics news as part of your revision!
  28. 28. AS Macro-Economics - March 2015 Key Takeaway Points • Fiscal policy affects both aggregate demand and aggregate supply (really important!) • There is a huge debate between fiscal conservatives and Keynesian economists • Fiscal austerity will last for another four years • Economic importance of infrastructure spending accepted by all UK political parties
  29. 29. AS Macro-Economics - March 2015 Get help from fellow students, teachers and tutor2u on Twitter: @tutor2u_econ

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