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What is the government budget?
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What is the government budget?
The government budget is a document that outlines the government's planned expenditures and expected revenues for a fiscal year.
What is a balanced budget?
A balanced budget occurs when government revenue equals government expenditure.
What is a budget deficit?
A budget deficit occurs when government expenditure exceeds government revenue.
Define the term budget surplus.
A budget surplus is when government revenue exceeds government expenditure.
How is a budget deficit financed?
A budget deficit has to be financed through public sector borrowing, which gets added to the public debt.
What are current expenditures?
Current expenditures are daily payments required to run the government and public sector, such as salaries and payments for goods and services.
What are capital expenditures?
Capital expenditures are investments in infrastructure and capital equipment, such as high-speed rail projects or new hospitals.
Define the term transfer payments.
Transfer payments are payments made by the government for which no goods or services are exchanged, e.g. unemployment benefits or subsidies.
True or False?
Transfer payments contribute to GDP.
False.
Transfer payments do not contribute to GDP, as income is only transferred from one group to another. When households spend any welfare payments received, that then contributes to GDP.
What are the types of government spending?
The types of government spending include:
Current expenditures
Capital expenditures
Transfer payments
True or False?
Public expenditure represents a significant portion of total demand in many economies.
True.
Public expenditure represents a significant portion of total (aggregate) demand in many economies.
What is the main source of government revenue?
The main source of government revenue is taxation.
Define the term direct taxes.
Direct taxes are taxes imposed on income and profits, paid directly to the government by individuals or firms.
Give examples of direct taxes.
Examples of direct taxes include:
Income tax
Corporation tax
Capital gains tax
National insurance contributions
Inheritance tax
Define the term indirect taxes.
Indirect taxes are taxes imposed on spending, such as Value Added Tax (VAT) or excise duties on fuel.
What is a progressive tax system?
A progressive tax system is one where a larger percentage of income is paid in tax as income rises.
Define the term regressive tax system.
A regressive tax system is one where a smaller percentage of income is paid in tax as income rises.
What is a proportional tax system?
A proportional tax system is one where the same percentage of income is paid in tax regardless of income level.
True or False?
Most countries have a mix of progressive and regressive taxes.
True.
Most countries have a mix of progressive (direct taxation) and regressive (indirect taxation) taxes in place. Indirect taxes are regressive.
What are marginal tax rates?
Marginal tax rates are the tax rates applied to additional income as income rises in a progressive tax system. For example:
0 - £10,000 the tax rate is 0%
£10,000 - £20,000 the tax rate is 10%
£20,000 - £50,000 the tax rate is 20%
What are principles of a good tax system?
The principles of a 'good' tax system include:
Simplicity
Fairness
Convenience
Efficiency
Fit for purpose
Flexibility
True or False?
Higher tax rates always increase government tax revenues.
False.
At some point, higher tax rates can disincentivise work and lead to tax avoidance, resulting in lower government tax revenues.
How can tax rate changes affect economic growth?
Increasing tax rates can reduce total (aggregate) demand as firms and households have less disposable income, slowing economic growth.
What is fiscal policy?
Fiscal policy involves the use of government spending and taxation to influence total (aggregate) demand in the economy.
Define the term expansionary fiscal policy.
Expansionary fiscal policy aims to increase economic growth through measures like reducing taxes or increasing government spending.
What is contractionary fiscal policy?
Contractionary fiscal policy aims to slow down economic growth or reduce inflation through measures like increasing taxes or decreasing government spending.
How often is the government's fiscal policy announced?
Fiscal policy is usually announced annually by the government when it releases its government budget.
What is the formula for calculating total demand?
Formula.
Total (aggregate) demand = household consumption (C) + firm investment (I) + government spending (G) + exports (X) - imports (M).
What are the usual effects of contractionary fiscal policy?
Contractionary fiscal policy, such as increasing income tax or reducing government spending, can:
Slow economic growth
Ease inflation
Increase unemployment
What are the usual effects of expansionary fiscal policy?
Expansionary fiscal policy, such as decreasing corporation tax or increasing unemployment benefits, can:
Increase economic growth
Increase inflation
Increase employment
True or False?
Fiscal policy can target specific industries.
True.
Government spending through fiscal policy can be targeted at specific industries.
What is a strength of fiscal policy?
A strength of fiscal policy is that its effects are seen sooner compared to monetary policy due to a shorter time lag.
What is the main weakness of fiscal policy?
A weakness of fiscal policy is that increased government spending can create budget deficits, leading to debt repayment and future austerity measures.
True or False?
Fiscal policy objectives never conflict.
False.
There can be conflicts between objectives, such as cutting taxes to increase economic growth, which may cause inflation.
How can fiscal policy redistribute income?
Fiscal policy can redistribute income through a progressive taxation system and welfare programmes that transfer resources from the wealthy to the poor.