Transcript 4.5 Government Economic Policy

4.5 Government Economic Policy
Taxation
• The government contributes greatly to economic
growth through its own expenditure. To finance this
spending, the government will raise money through
taxation:
– Indirect Taxes – taxes places on expenditure, in others
words, you pay these taxes depending on what you use. IE:
VAT, customs duties placed on imported goods, excise
duties (taxes placed on specific goods such as petrol,
alcohol and tobacco)
– Direct Taxes – taxes placed on incomes earned. IE: Income
Tax, National Insurance, Corporation Tax.
– Other Taxes – IE: Stamp duty (placed on the purchase price
of a house); Council tax (charged on each house and varies
according to the value of the property); Inheritance tax
(paid on any inheritance earned when an estate passes on
to someone else when an individual dies)
Government Expenditure
(Categories of spending)
• Social Protection – includes welfare payments
paid to those in need. (Some are based on a
person’s circumstances – Jobseeker’s Allowance,
others are paid regardless of status – Child
benefits)
• Health – NHS, 2nd largest component of gov’t
spending, as UK population is ageing, the
demands on NHS are likely to rise in the future.
• Other categories: Transport, Education, Defence,
Debt interest, Public order and safety,
Environment, Agriculture, Employment and
training . . .
Fiscal Policy
• Decisions made by the government on
government expenditure and taxation
– As governments spend large amounts in the
economy, changes in government expenditure
have a major impact on economic performance
and their ability to reach their economic
objectives
– High expenditure means taxes are very significant
in funding this expenditure. Therefore changes in
taxation will have a significant effect on the
performance of the economy.
The Effects of Fiscal Policy
• Changes in the level of government spending, and changes in the level of
taxation, will affect each of the government’s economic objectives:
Economic
Objective
Inflation
Economic
Growth
Full
Employment
Balance of
Payment
Government Spending
Taxation
Monetary Policy
• Decisions which control the supply or cost of
money.
– Involves changes in interest rates which represent
the cost of borrowing money.
– Is set by the Bank of England (UK’s central bank)
– Interest rates are used to control inflation and
economic growth
How does Monetary Policy . . .
• Control Inflation?
• Control Growth?
Supply-side policies
• Economic growth can be increased with more
spending.
• However, if spending rises quicker than the rate at
which output increases, it will lead to inflation. (ie:
there is a shortage of items to purchase)
• Therefore, it is important that an economy can
produce more output over time.
• Policies to raise the rate of growth of output without
boosting spending are known as SUPPLY-SIDE
POLICIES.
• Supply-side policies allow economies to grow faster
with fewer risks of inflation.
What are supply-side policies?
• Education and training – increasing the quality and
quantity of education and training should make
people more productive, this higher productivity
should lead to higher national output.
• Competition – encouraging competition between
businesses should lead to higher output levels and
lower prices because of the pressure between
businesses to retain customers (ie: aid for small
businesses, privatisation, deregulation)
• Labour market policies – decreasing direct taxes
provides workers with incentives to rejoin the
workforce, and for firms to recruit more workers, a
reduction in trade union power also encourages
firms to recruit more workers