Fiscal Policy

Office for Budget Responsibility

The Office for Budget Responsibility (OBR) was formed in May 2010 to make an independent assessment of the public finances and the economy, the public sector balance sheet and the long term sustainability of the public finances. The establishment of the OBR marks a step change in the transparency and openness of economic and fiscal policy making.

The OBR has a role as the producer of the UK’s official forecast.

What is the current governments approach to fiscal policy?

The current government talks about re-balancing the economy – What does this mean?

What is the likely economic impact of the following budget stances?

Budget surplus
(Contraction) / Budget deficit
(Expansion) / Budget balance
Impact on ADAS
Impact on economic objectives? / G
U
B
I / G
U
B
I / G
U
B
I

Government Spending

What are these elements of government spending?

  1. Current expenditure
  1. Transfer payments
  1. Capital spending

Government Finances

What are the main items of government expenditure?

What are the benefits and costs of government spending?

Benefits / Costs
Equity / Taxation
Macroeconomic policy
Multiplier effects / Waste and inefficiency
Public services/Infrastructure / Crowding out

How have governments tried to improve the efficiency of government spending in recent years?

Explain contracting out and competitive tendering

Taxation

1. What are the principles of taxation?

2. Define these terms

Direct tax –

Indirect tax –

Progressive tax –

Regressive tax –

Proportional tax –

Income tax payable by income / Number of taxpayers (thousands) / Average rate of tax (percentages)
£6,035–£7,499 / 1,440 / 1.9
£10,000–£14,999 / 6,390 / 8.4
£15,000–£19,999 / 4,930 / 11.7
£20,000–£29,999 / 6,910 / 14.0
£50,000–£99,999 / 2,010 / 23.3
£100,000–£199,999 / 470 / 30.1
£1,000,000 and over / 11 / 35.9
All incomes / 31,000 / 17.9

Indicate how the table above illustrates the progressive nature of the UK income tax system.

In the 2009 Budget, Chancellor raised the rate of income tax on those earning over £150,000 to 50% from April 2010.In the 2012 Budget the Chancellor announced that the top rate of tax would fall back to 45%. Argue the case for and against this cut.How progressive should our tax system be?

For / Against

In 2010 the UK Government raised VAT from 17.5% to 20%. What are the key arguments for and against using indirect taxation?

Arguments For Using Indirect Taxation / Arguments Against Using Indirect Taxation
Affect the pattern of economic activity / More regressive than direct taxes
Correcting for externalities / Can cause cost-push inflation
Less likely to have a negative effect on work incentives. / Taxes by stealth

Comment on the composition of tax revenue in the UK.

What is the balance between progressive and regressive taxes?

What is the balance between direct and indirect taxes?

How have taxes changed in recent years?

Tax changes

What is meant by hypothecation of taxes? How might it be used?

Assessing Fiscal Policy

What are the strengths and weaknesses of fiscal policy?

Strengths / Weaknesses
Automatic stabilisers
Demand management
Fiscal multiplier effects
Can impact on the supply side
Can impact on poverty/inequality / Time lags
Crowding out
The growth of debt
Political purpose

What are the dangers of fiscal policy?

What are the alternative ways of managing the economy instead of fiscal policy?

Public Sector Debt

How does the government borrow money?

Why did the size of the public sector deficit in the UK rise?

What are the costs and benefits to a country running a large budget deficit?

Costs / Benefits
Interest rates and taxes / Generate economic growth
Increase in National Debt / Demand management tool
Wasteful public spending / Increased equality

What are fiscal rules such as the Stability and Growth pact?