Fiscal Policy
The manipulation of government spending, policy and taxation to influence the economy
Key Terms
Bond Yield The rate of interest paid on government
debt
Budget (Fiscal) Deficit The difference between what the
government receives in revenue and what it
spends
Cyclical Fiscal Deficit The size of the deficit is influenced by the
state of the economy: in a boom, tax
receipts are relatively high and spending on
unemployment benefit is low
Direct Taxation Taxes on income, profits and wealth, paid
directly by the bearer to tax authorities
Indirect Taxation Taxes on expenditure, they are paid by the
suppliers of the goods or services, but it can
be passed on in the form of higher prices
National Debt The total amount owed by the government
Structural Fiscal Debt The part of the deficit which is not related
to the state of the economy, it will not
disappear when the economy recovers
Government Spending
Three main spending routes:
1. Transfer payments (welfare)
2. Recurring spending (public services)
3. Investment projects (state investment)
Current spending: spending on state provided goods and services that are provided on a
recurrent basis
Capital spending: Investment on capital goods which adds to an economy’s capital stock
Education spending Healthcare spending
May increase skills and productivity Improved health will increase the active
labour supply
Improvement in human capital will lower Will increase productivity
structural unemployment
More innovation/competitiveness Lessens risks of relative poverty
Evaluation:
Effectiveness has been questioned, Can be achieved other ways, lifestyle
dependent on subject choice changes or campaigns
Might be better spent on certain ages Might not be equally distributed
The manipulation of government spending, policy and taxation to influence the economy
Key Terms
Bond Yield The rate of interest paid on government
debt
Budget (Fiscal) Deficit The difference between what the
government receives in revenue and what it
spends
Cyclical Fiscal Deficit The size of the deficit is influenced by the
state of the economy: in a boom, tax
receipts are relatively high and spending on
unemployment benefit is low
Direct Taxation Taxes on income, profits and wealth, paid
directly by the bearer to tax authorities
Indirect Taxation Taxes on expenditure, they are paid by the
suppliers of the goods or services, but it can
be passed on in the form of higher prices
National Debt The total amount owed by the government
Structural Fiscal Debt The part of the deficit which is not related
to the state of the economy, it will not
disappear when the economy recovers
Government Spending
Three main spending routes:
1. Transfer payments (welfare)
2. Recurring spending (public services)
3. Investment projects (state investment)
Current spending: spending on state provided goods and services that are provided on a
recurrent basis
Capital spending: Investment on capital goods which adds to an economy’s capital stock
Education spending Healthcare spending
May increase skills and productivity Improved health will increase the active
labour supply
Improvement in human capital will lower Will increase productivity
structural unemployment
More innovation/competitiveness Lessens risks of relative poverty
Evaluation:
Effectiveness has been questioned, Can be achieved other ways, lifestyle
dependent on subject choice changes or campaigns
Might be better spent on certain ages Might not be equally distributed
