4.5.4

Question 1

Policies to reduce fiscal deficits and national debts

Answer 1

• Policy of austerity (contr fiscal) - decreased spending - could increase taxes
  Eval: politically unpopular - limit growth - reduce living standards and income equality - free market economists argue spending can be reduced by cutting out waste - how significant are efficiency savings?
• Demand stimulus by increased spending (exp fiscal) - cause growth - higher tax revenues - budget surpluses - eventual reduction of national debt
  Eval: contr vs exp
• Rely on automatic stabilisers to allow economy to grow - national debt will reduce as a percentage of GDP
• Default on debt
  Eval: hard to access credit in future

saudi - used sale of oil to decrease percentage of national debt as a proportion of GDP 80% - 10.2%
Sweden used spending cuts and tax rises to balance budget

Question 2

Measures to reduce poverty and inequality

Answer 2

• Free market unlikely to create an equal society - some redistribution needed
• Right-wing - high incomes and profits essential to provide an incentive
  -Left wing - those on low incomes must be supported
• Progressive tax system - inheritance tax
  Eval: Hard to enforce - avoidable by careful tax planning - laffer curve
  Progressive tax system must be supported by well-functioning welfare system (USA)
  Scandinavian countries effectively collect tax and distribute well even though the system is less progressive
• Use government expenditure in form of benefits and transfer payments - universal/means-tested
  Eval: lose incentive to work if benefits get too high - very controversial topic particularly when doing austerity measures
• Direct provision - equal opportunities and access to services they may otherwise not be able to afford - equal start in life - can prevent poverty cycle
  Eval: Benefit those on high incomes - opp cost
• Reduce wage differentials - NMW, maximum wage, trade union friendly legislations, equal pay legislation, employers forced to provide benefiiits
  Eval: unemployment - brain drain
• Free market - ‘trickle down’ - rich create jobs by spending money - derived demand - employing others
  Eval: believe inequality is necessary as an incentive
• Law of diminishing marginal utility suggests redistribution increases total utility - better allocation of resources - the poor gain more satisfactions from a small amount of money compared to rich people - Nordic countries

Question 3

Changes in interest rate and supply of money

Answer 3

• Monetary policy - stimulate economy - raise gov revenue - low IR - encourage spending and investment
• QU - stimulate economy - cannot lower IR further

Question 4

Measures to increase international competitiveness

Answer 4

• Supply side policies - improve productivity - flexibility - deregulation - encourage competition - force efficiency in global market - tax incentives - education improves skills - e.g. ‘red tape challenge’
• Exchange rate policies
• Join WTO or sign trade agreements

Question 5

Macroeconomic policies to respond to external shocks

Answer 5

• SUPPLY SHOKS - globalization - increased interdependence - expansionary policy can reduce impact of a fall in GDP after a supply shock - deflationary policy
• Financial crisis - expansionary policy
• Brexit - lower IR to improve confidence - raised again to deal with inflation cause by falling value of the pound

Question 6

Transnational companies - TNCs

Answer 6

• Bring huge gains - create jobs, tax revenue, knowledge, expertise, investment
• Destroy local culture - environmental degradation - withdraw more in profits than they inject through investment - influence politicians - lobbying - favour their interests and tax avoidance - illegal
• Some developing countries only allow joint ventures first

Question 7

TNCs - regulation of transfer pricing

Answer 7

• Transfer pricing allows firms to engage in tax avoidance - produce a good in one (high tax) country - transfer it to another (low tax) - create another good - sell it in that country
• Set low price in first country - high price in second country - reduce overall tax bill
• Challenged by HMRC
• Transfer pricing guidelines - arms length principle - price should be the same as if the two parties were independent of each other

Question 8

TNCs - ability to control global companies

Answer 8

• Difficult for individual governments to control TNCs - small countries may earn less in revenues than a TNC earns in profits
• EU suffers from legal tax avoidance schemes - ‘dutch sandwich’ - C/R/P routed through Netherlands - sent to tax haven like Cayman Islands
• Solutions require worldwide agreement - time and money - benefit one - loss for another - division within countries - allow for lobbying

Question 9

Problems facing policy makers: inaccurate info

Answer 9

• Short-term figures (GDP for previous month) often inaccurate - gov is unable to see problems
• Difficult to cut down on tax avoidance - does not have full info on level of avoidance - who is avoiding the tax - best way to reduce it
• Trends may change
• C/B analysis time consuming and costly

Question 10

Problems facing policy makers: risks and uncertainties

Answer 10

• Cannot predict future - difficult to know whether extra spending is necessary
• Can’t know full impact of decision - unintended consequences of consumers - must manage risk

Question 11

Problems facing policy makers: external shocks

Answer 11

• Cannot control or prepare for external shocks but they can lessen the impact
• Every situation is difficult - which method is best?
• Policies may not have intended impact - undermine current policies - uncertainty