Economics 4.3 Public finance, macroeconomic policies, and poverty and inequality.

Objectives of taxation

- As a means of managing the economy (part of fiscal policy - To raise revenue to finance public expenditure - Defence and internal security - To redistribute income - To internalise external costs - To influence the pattern of expenditure

Objectives of public expenditure

- As a means of managing the economy (part of fiscal policy) - Provision of public goods - Defence and internal security - Redistribution of in income - To deal with external costs from production and consumption. - Provision of goods yielding external benefits or where there are information gaps.

Two key features of fiscal policy

- Automatic stabilisers: changes in government expenditure and tax revenue which occur as GDP rises or falls without any change in government policy. Stabilisers help t reduce fluctuations in the level of economic activity caused by the trade cycle. - Discretionary fiscal policy: involves deliberate changes in public expenditure and taxation by the government in an attempt to influence the level of economic activity.

Types of macroeconomic policies

- Demand-side policies: these policies are designed to influence aggregate demand and may be divided into fiscal policy and monetary policy. - Supply-side policies: these are a range of policies which are aimed at increasing aggregate supply by increasing competitiveness, increasing incentives and increasing productivity.

Criticisms of supply side policies

- Increased inequality - Exploitation - Ineffectiveness - Market failure - Time lags

What determines the size of public expenditure

- Level of GDP - Demand for public services - Size and age distribution of the population - The state of the economy - Discretionary fiscal policy - Debt interest - Rate of inflation - Political factors

Significant of a structural budget deficit

- National debt would increase - Loss of AAA credit rating = higher rate of interest on its bonds. - Crowding out: could imply that the size of the public sector is increasing. - Inflation: injections of state spending greater than withdrawals, so AD will increase which could cause inflationary pressure. - Decrease in FDI: uncertainty concerning the future state of the economy. - Expenditure and infrastructure

The effect or magnitude of reflationary or expansionary fiscal policy depends on factors such as

- The value of the multiplier - In the case of a cut in income tax rates, people may save their extra disposable income rather than spend it, or they may spend it on imports. - Time lags involved. - In the case of deflationary fiscal policy, there may be significant disincentive effects when tax rates are increased e.g might cause a reduction in FDI while an increase in income tax rates might discourage unemployed workers from seeking work.

Consequences of poverty and inequality

- Those in absolute poverty may be unable to secure a loan in order to start their own business - Marginal propensity to save will be low, limiting the funds available for investment. - The rich may spend a large amount of their incomes on imported goods or they may transfer a large proportion of their incomes abroad. - Inequality may result in a loss of social cohesion, which could have adverse consequences for growth.

Significance of national debt

- a loss of the country AAA credit rating - crowding out - inflation - decrease in FDI - opportunity cost for future generations

Labour market policies

- improvements in human capital through education and training - Reduction in trade union power - Reduction in unemployment benefits - Reduction in income tax rates - Reduction in employment protection legislation.

Product-market policies

- privatisation - promotion of new/ small firms - trade liberalisation

Capital-market policies

- reduction in corporation tax rates - deregulation of financial markets

Macroeconomic objectives

1. Economic growth 2. Sustainable growth 3. full employment 4. A low and stable rate of inflation 5. Balance of payments equilibrium on current account 6. Redistribution of income 7. Fiscal balance

how is the gini coefficient calculated from the lorenz curve

Area between the diagonal line and the Lorenz curve divided by the area between the diagonal line and the Lorenz curve + the area under the Lorenz curve. A ----- A + B

Public expenditure

Essentially money spent by the state or by a state-run organisation.

Transfer payments

Payments made by the state to individuals without there being any exchange of good or services.

3 categories of taxation

Progressive tax: tax in which the proportion of income paid in tax rises as income increases Proportional tax: tax which the proportion of income paid in tax remains constant as income increases. Regressive tax: is a tax in which the proportion of income paid in tax falls as income increases.

Monetary policy

Relates to changes in interest rates, money supply and exchange rates as a means of influencing economic activity.

Current expenditure

Relates to the governments day to day expenditure on goods and service e.g wages.

External benefits

Spill over benefits to third parties who are not part of the transaction between a consumer and producer.

External costs

Spill over costs to third parties who are not part of the transaction.

PSNB

Stands for public sector net borrowing and refers to a situation in which public expenditure is greater than tax revenue.

What is the lorenz curve

a graphical representation of income distribution. For example, it might show that the poorest 10% of the population earns just 1% of the countries income.

Quantitive easing

a process by which the bank of England increases the money supply by buying government bonds and corporate bonds from financial institutions.

Income tax

a progressive tax levied at three rates: 20% 40% 45%

Corporation tax

a proportional tax on company profits, the rate of which will be reduced from 28% in 2010 to 21% in 2014.

Capital gains tax

a tax on the increase in value of assets between the time they were bought and the time they were sold e.g on shares

VAT

ad valorem tax (percentage of product)

Automatic stabilisers

changes in government spending or in tax revenue which occur automatically, without deliberate action by the government.

Define public goods

goods which would be under-provided and under-consumed because they are non-excludable and are non-rivalrous so are provided by the state.

Relative poverty

is measured in comparison with other people in the country and will vary between countries.

Austerity measures

measures taken to reduce government expenditure or expenditure by the country's citizens. Key aim is to reduce the budget deficit.

Income elastic

occurs when a change in real income cause a more than proportionate increase in demand.

Resource crowding out

occurs when economy is operating at full employment and the expansion of the public sector means that there is a shortage of resources in the private sector.

Financial crowding out

occurs when the expansion of the state sector is financed by increased government borrowing. Causes an increased demand for loanable funds which drives up interest rates and crowds out private sector investment.

Inheritance tax

proportional tax on inherited assets levied at a rate of 40% on estates worth over 325,000

Supply side policies

refer to a range of policies aimed at improving the supply side of the economy by increasing competitiveness, increasing incentives and increasing productivity.

Capital expenditure

refers to long-term investment on capital projects such as Crossrail, new schools etc.

Indirect taxes

taxes on expenditure

Tariffs

taxes on imported goods

Direct taxes

taxes on income and wealth

National debt

total sum owed by a government to holders of government bonds. In other words, it represents the total of a governments outstanding debt which it has accumulated over time.

Excise duties

usually specific taxes i.e set amount per unit.

Absolute poverty

when a person has insufficient resources to meet basic human needs e.g food, shelter etc