pubic expenditure

Question 1

what is current govt expenditure?

Answer 1

• spending which recurs. this is on goods and services which are consumed and last a short period of time
  
  • e.g drugs for health service

Question 2

what is capital govt expenditure?

Answer 2

• spent on assets which can be used multiple times
  
  • e.g govt expenditure on roads/ buildings

Question 3

what are transfer payments?

Answer 3

• welfare payments from the govt
  
  • aim to provide a minimum standard of living for those on low incomes
  • no goods or services are exchanged for transfer payments
• help to reduce the level of inequality in society
• are a means to redistribute income from the rich to the poor

Question 4

what are examples of transfer payments in the Uk?

Answer 4

o Job Seeker’s Allowance
o Income Support
o Child benefit
o The state pension

Question 5

what are the reasons for changing size and composition of public expenditure in a global context?

Answer 5

• in the UK, the govt spends most of their budget on pensions and welfare benefits, followed by health and education
• income tax is the biggest source of tax revenue
• education spending in the UK have remained relatively constant
  
  • this is because its protected so it doesnt fall
  • however it doesnt inc by much either
• social security payments are payments from the govt to assist those who have low incomes
• defence spending in the UK is falling

Question 6

how does the govt spend a proportion of GDP on productivity and growth?

Answer 6

• govts can spend money on supply-side policies to improve human capital and inc long run growth
• human capital is important for competitiveness
• education and training can mean higher value products can be made and productivity can be improved
• fiscal policy aims to stimulate economic growth and stabilise the economy
• govt could influence the size of the circular flow by changing govt budget
  
  • spending and taxes can be targeted in areas which need stimulating

Question 7

how does the govt spend a proportion of GDP on crowding out?

Answer 7

• govts might have to fund its spending using taxes/ running a budget deficit
• this leaves fewer funds in the private sector for firms to use since the govt is borrowing money
  
  • crowds them out of the market
• when govt borrows a lot of money, interest rates may inc
• this discourages spending and investment
  
  • this is the crowding out of investment
• crowding out may also refer to the govt provision of a good/service which would otherwise be provided by the private sector

Question 8

why may levels of taxation change?

Answer 8

• tax rate may inc if the govt debt gets too high
• if confidence is lost in the govts ability to repay debt govt may have to raise interest rates to encourage investors to buy bonds so they can finance the debt
• could lead to higher tax rates and austerity measures

citizens in the UK have a lower tax burden than in a country such as Switzerland, where government spending is 60% of GDP

Question 9

how does the govt spend a proportion of GDP to influence equality and living standards?

Answer 9

• progressive tax can be used to reduce inequality as the poorest in society pay the smallest proportion of their income tax
• redistributive policies and welfare payments could be used to help those on lowest incomes
• govt spending on housing and provision of public services such as education provide equal opportunities from all income backgrounds
• this ensures that even those on low incomes can afford a good standard of healthcare and education
  
  • through this the govt ensures that all members of society can achieve a minimum standard of living

Question 10

what are the 3 components that govt spending is split into

Answer 10

transfer payents
capital expenditure
current expenditure

Question 11

what are the reasons for govt expenditure

Answer 11

provide merit goods
provide goods that wont be provided for by the private sector
redistribute income through transfer payments
provide essential services
overcome forms of market failure

Question 12

why do governments levy taxes

Answer 12

assist govt in achieving its macroeconomic objectives
finance govt expenditure
repay govt debt
redistribute income and wealth

Question 13

what are the principles of taxation

Answer 13

economical- should be cheap to collect in relation to the revenue it yields
equitable- should be fair and based on taxpayers ability to pay
efficient- should achieve objectives with minimum negative consequences
convenient for taxpayers to pay
certain - taxpayers should be certain of the amount of tax they need to pay
flexible - change if circumstances change

Question 14

what are the disadvantages of direct taxes

Answer 14

easy to avoid/ evade
high earners can avoid tax by signing up for tax efficient schemes provided by their financial advisers
highly progressive income tax may disincentivise hard work, risk taking and entrepreneurial

Question 15

how do direct taxes affect the economy

Answer 15

influence on investment -> if corporation tax too high then they have less money leftover for investment
incentive to work
infuence on tax avoidance/ evasion
influence on consumption
impact on the distribution of income

Question 16

how do indirect taxes work

Answer 16

levied on spending
imposed on goods and services and firms pass on this cost to the consumer
levied onto products which have inelastic demand
high rates can be a burden on low income households

Question 17

what are the advantages of using indirect taxation

Answer 17

can change pattern of demand
can be used account for externalities as external cost included within the private cost
less likely to distord to choices between work and leisure and therefore have less of a negative effect on work incentives
can be changes more easily than direct taxes
less easy to avoid

Question 18

what are the disadvantages of indirect taxation

Answer 18

widen income inequality
cost push inflation -> inc in inflation expectations
if indirect taxes too high this creates an incentive to avoid taxes
revenue from taxes can be uncertain especially when inflation is low or theres a recession
loss of welfare
affect households on lowest incomes who are least able to save

Question 19

how can rising taxes affect the economy

Answer 19

influence on inflation
influence on consumption of merit/demerit goods
influence on SRAS
inlfuence on consumption decisions

Question 20

what is the keynesian view on direct taxes

Answer 20

lower direct tax rates stimulate higher spending within the circular flow which itself boosts demand, output, profits and unemployment
these can inc tax rev further

Question 21

what is fiscal drag

Answer 21

occurs when inflation results in taxpayrs recieving higher incomes and moving into higher income tax bands- hence paying a higher percentage of income as tax if the tax brackets dont move in line with inflation

Question 22

what is the difference between discretionary fiscal policy and automatic stabilisers

Answer 22

govt takes action by purposefully increasing or decreasing tax/ govt spending to achieve macro objectives(they choose to do so) whereas automatic stabilisers ccur independently in linen with the trade cycle