Updated (20123) revision presentation on aspects of fiscal policy - designed for student and teachers taking the AS macro paper.

1. Fiscal Policy and the Economy
AS Macro –
Autumn
2013
08:04

2. What is fiscal policy?
• Fiscal policy involves the use of government spending, taxation and
borrowing to affect the level and growth of aggregate demand,
output and jobs
• Fiscal policy is also used to change the pattern of spending on
goods and services
• It is also a means by which a redistribution of income & wealth can
be achieved for example by changing tax rates on different levels of
income or wealth
• It is an instrument of micro-economic government intervention to
correct for free-market failures such as pollution or the sub-optimal
provision of public and merit goods
• Changes in fiscal policy affect aggregate demand (AD) and
aggregate supply (AS)
08:04

3. Some key roles for fiscal policy
Financing key areas of
government spending
Providing a welfare state
safety-net for families
Managing the
macroeconomic cycle
08:04
Altering the distribution
of income and wealth
Improving country’s
competitiveness
Tackle market failures
through intervention

4. Some key roles for fiscal policy
Financing key areas of
government spending
Providing a welfare state
safety-net for families
Managing the
macroeconomic cycle
08:04
Altering the distribution
of income and wealth
Improving country’s
competitiveness
Tackle market failures
through intervention

5. Some key roles for fiscal policy
Financing key areas of
government spending
Providing a welfare state
safety-net for families
Managing the
macroeconomic cycle
08:04
Altering the distribution
of income and wealth
Improving country’s
competitiveness
Tackle market failures
through intervention

6. Some key roles for fiscal policy
Financing key areas of
government spending
Providing a welfare state
safety-net for families
Managing the
macroeconomic cycle
08:04
Altering the distribution
of income and wealth
Improving country’s
competitiveness
Tackle market failures
through intervention

7. Some key roles for fiscal policy
Financing key areas of
government spending
Providing a welfare state
safety-net for families
Managing the
macroeconomic cycle
08:04
Altering the distribution
of income and wealth
Improving country’s
competitiveness
Tackle market failures
through intervention

8. Some key roles for fiscal policy
Financing key areas of
government spending
Providing a welfare state
safety-net for families
Managing the
macroeconomic cycle
08:04
Altering the distribution
of income and wealth
Improving country’s
competitiveness
Tackle market failures
through intervention

9. Direct and Indirect Taxation
• Direct taxation is levied on income, wealth
and profit. Direct taxes include income tax,
inheritance tax, national insurance
contributions, capital gains tax, and
corporation tax.
• Indirect taxes are taxes on spending – such as
excise duties on fuel, cigarettes and alcohol
and Value Added Tax (VAT) on many different
goods and services
08:04

10. Micro recap – indirect taxes!
A specific tax when demand is elastic
An ad valorem tax when demand is inelastic
S + Tax
Price
Price
S + Tax
S1
S1
P2
P2
P1
D1
P1
D1
Q2
08:04
Q1
Qty
Q2 Q1
Quantity

11. Micro recap – indirect taxes!
A specific tax when demand is elastic
An ad valorem tax when demand is inelastic
S + Tax
Price
Price
S + Tax
S1
S1
P2
P2
P1
D1
P1
D1
Q2
08:04
Q1
Quantity
Q2 Q1
Quantity

12. Justifications
for taxation
• Revenue to pay for government spending
– (e.g. on public and merit goods and services)
• Managing aggregate demand
– To help meet objectives such as stable inflation and
growth
• Changing distribution of income and wealth
– A progressive system of taxation can help bring
greater equality in income & wealth between
households
08:04

13. Direct Taxes
• Direct taxation is levied on income,
wealth and profit
• Direct taxes include
–
–
–
–
income tax
national insurance contributions
capital gains tax
corporation tax
• The burden of a direct tax cannot be
shifted
• Over the last twenty years in the
British economy, there has been a
shift towards indirect taxes
08:04

14. Tax Knowledge!
Tax
Income tax
Basic rate
Higher rate
Additional rate
VAT
National insurance contributions (employees)
Inheritance tax (threshold for paying = £325K)
Beer (duty per pint, 3.9% abv)
Cigarettes (duty on pack of 20, includes VAT)
08:04
Tax rate (%, or level)

15. Tax Knowledge!
Tax
Tax rate (%, or level)
Income tax
Basic rate
Higher rate
Additional rate
VAT
20%
National insurance contributions (employees)
12%
Inheritance tax (threshold for paying = £325K)
40%
Beer (duty per pint, 3.9% abv)
43p
Cigarettes (duty on pack of 20, includes VAT)
08:04
20%
40%
45%
£4.52

16. Income Tax
Component
Income tax free personal allowance*
£9,440
Tax rate on taxable income:
Basic rate: 20%
£0-£32,010
Higher rate: 40%
£32,011- £150,000
Additional rate: 45% from 6 April 2013
Over £150,000
* The Personal Allowance reduces where the income is above £100,000 - by
£1 for every £2 of income above the £100,000 limit.
08:04

17. The
Effective
Tax Rate
in the UK
The total
effective tax rate
– is the total
amount paid by
households in
both direct and
indirect taxes as
a percentage of
their gross
income.
08:04

18. The main tax revenues for the UK
There was a sustained rise in tax revenues during
the long boom for the UK economy
Recession and slow recovery has hit tax receipts
08:04

19. How taxes and benefits affect the
distribution of income
Average income per
household
(£ per year)
Quintile groups
Bottom
2nd
3rd
4th
Top
Cash benefits
7 419
8 448
7 187
4 388
2 453
Benefits in kind
7 674
7 386
7 380
6 260
5 238
Direct taxes
-1 306
-2 263
-4 781
-8 887 -19 905
Indirect taxes
-3 400
-4 009
-5 206
-6 230
Net position
10 387
9 561
4 580
-8 743
-4 469 -20 958
Source: Office
for National
Statistics
08:04

20. Taxes, welfare and income inequality
Percentage shares of income for ALL households in 2012
Original
income
Quintile group
Bottom
2nd
3rd
4th
Top
All households
Decile group
Bottom
Top
Gini coefficient
(per cent)
08:04
Gross
income
Disposable
income
Post-tax
income
3
7
14
24
51
100
7
11
16
23
43
100
8
13
17
22
41
100
7
12
16
22
42
100
1
33
3
27
3
26
2
27
52
36
32
36
Source: Office for National Statistics

21. Progressive and regressive taxes
• With a progressive tax, the marginal rate of tax
rises as income rises. I.e. as people earn more
income, the rate of tax on each extra pound goes
up. This causes a rise in the average rate of tax
• With a proportional tax, the marginal rate of tax
is constant
• With a regressive tax, the rate of tax falls as
incomes rise – I.e. the average rate of tax is lower
for people of higher incomes
08:04

22. Data on Taxation and Incomes
Quintile groups of ALL
households1
Bottom
2nd
3rd
4th
Top
Income tax
3.5
4.8
8.5
12.1
17.3
Employees' NIC
1.3
2.4
4.0
5.5
5.5
All direct taxes
10.2
11.2
15.9
20.5
24.7
VAT
10.3
8.2
7.1
6.3
5.1
Duty on alcohol
1.5
1.1
1.0
0.9
0.7
Duty on tobacco
2.8
1.6
1.5
0.7
0.3
All indirect taxes
26.5
19.8
17.3
14.4
10.8
All taxes
36.6
31.0
33.1
34.9
35.5
Percentages of gross income
Direct taxes
Indirect taxes
08:04
Progressive

23. Data on Taxation and Incomes
Quintile groups of ALL
households1
Bottom
2nd
3rd
4th
Top
Income tax
3.5
4.8
8.5
12.1
17.3
Employees' NIC
1.3
2.4
4.0
5.5
5.5
All direct taxes
10.2
11.2
15.9
20.5
24.7
VAT
10.3
8.2
7.1
6.3
5.1
Duty on alcohol
1.5
1.1
1.0
0.9
0.7
Duty on tobacco
2.8
1.6
1.5
0.7
0.3
All indirect taxes
26.5
19.8
17.3
14.4
10.8
All taxes
36.6
31.0
33.1
34.9
35.5
Percentages of gross income
Direct taxes
Indirect taxes
08:04
Progressive
Progressive

24. Data on Taxation and Incomes
Quintile groups of ALL
households1
Bottom
2nd
3rd
4th
Top
Income tax
3.5
4.8
8.5
12.1
17.3
Employees' NIC
1.3
2.4
4.0
5.5
5.5
All direct taxes
10.2
11.2
15.9
20.5
24.7
Progressive
VAT
10.3
8.2
7.1
6.3
5.1
Regressive
Duty on alcohol
1.5
1.1
1.0
0.9
0.7
Duty on tobacco
2.8
1.6
1.5
0.7
0.3
All indirect taxes
26.5
19.8
17.3
14.4
10.8
All taxes
36.6
31.0
33.1
34.9
35.5
Percentages of gross income
Direct taxes
Progressive
Indirect taxes
08:04

25. Data on Taxation and Incomes
Quintile groups of ALL
households1
Bottom
2nd
3rd
4th
Top
Income tax
3.5
4.8
8.5
12.1
17.3
Employees' NIC
1.3
2.4
4.0
5.5
5.5
All direct taxes
10.2
11.2
15.9
20.5
24.7
Progressive
VAT
10.3
8.2
7.1
6.3
5.1
Regressive
Duty on alcohol
1.5
1.1
1.0
0.9
0.7
Duty on tobacco
2.8
1.6
1.5
0.7
0.3
All indirect taxes
26.5
19.8
17.3
14.4
10.8
All taxes
36.6
31.0
33.1
34.9
35.5
Percentages of gross income
Direct taxes
Progressive
Indirect taxes
08:04
Regressive

26. Data on Taxation and Incomes
Quintile groups of ALL
households1
Bottom
2nd
3rd
4th
Top
Income tax
3.5
4.8
8.5
12.1
17.3
Employees' NIC
1.3
2.4
4.0
5.5
5.5
All direct taxes
10.2
11.2
15.9
20.5
24.7
Progressive
VAT
10.3
8.2
7.1
6.3
5.1
Regressive
Duty on alcohol
1.5
1.1
1.0
0.9
0.7
Duty on tobacco
2.8
1.6
1.5
0.7
0.3
All indirect taxes
26.5
19.8
17.3
14.4
10.8
All taxes
36.6
31.0
33.1
34.9
35.5
Percentages of gross income
Direct taxes
Progressive
Indirect taxes
08:04
Regressive
Close to being
proportional

27. Taxation and Aggregate Demand
Changes in tax rates and tax allowances can have a direct and indirect effect
on the level of aggregate demand
Government spending can be used to
manage the level and growth of AD to
meet macroeconomic policy objectives
such as low inflation and higher levels of
employment
When private sector demand for goods and
services is low, the government needs to
find a compensating source of demand to
rebalance the economy – and the solution
comes from the government in the form of
higher borrowing or less saving.
08:04

28. Taxation and Aggregate Demand
Changes in tax rates and tax allowances can have a direct and indirect effect
on the level of aggregate demand – here are some examples
Income tax and
disposable income
Taxation of imports
National insurance and
labour demand
08:04
Corporation taxes and
business investment
VAT and consumer
spending
Taxation and R&D
spending

29. Taxation and Aggregate Demand
Changes in tax rates and tax allowances can have a direct and indirect effect
on the level of aggregate demand – here are some examples
Income tax and
disposable income
Taxation of imports
National insurance and
labour demand
08:04
Corporation taxes and
business investment
VAT and consumer
spending
Taxation and R&D
spending

30. Taxation and Aggregate Demand
Changes in tax rates and tax allowances can have a direct and indirect effect
on the level of aggregate demand – here are some examples
Income tax and
disposable income
Taxation of imports
National insurance and
labour demand
08:04
Corporation taxes and
business investment
VAT and consumer
spending
Taxation and R&D
spending

31. Taxation and Aggregate Demand
Changes in tax rates and tax allowances can have a direct and indirect effect
on the level of aggregate demand – here are some examples
Income tax and
disposable income
Taxation of imports
National insurance and
labour demand
08:04
Corporation taxes and
business investment
VAT and consumer
spending
Taxation and R&D
spending

32. Taxation and Aggregate Demand
Changes in tax rates and tax allowances can have a direct and indirect effect
on the level of aggregate demand – here are some examples
Income tax and
disposable income
Taxation of imports
National insurance and
labour demand
08:04
Corporation taxes and
business investment
VAT and consumer
spending
Taxation and R&D
spending

33. Taxation and Aggregate Demand
Changes in tax rates and tax allowances can have a direct and indirect effect
on the level of aggregate demand – here are some examples
Income tax and
disposable income
Taxation of imports
National insurance and
labour demand
08:04
Corporation taxes and
business investment
VAT and consumer
spending
Taxation and R&D
spending

34. Will tax cuts boost
demand?
Direct tax cuts and AD
General
Price Level
SRAS1
P2
P1
AD1
Y1
08:04
Y2
AD2
Real National
Output (Y)

35. Taxation and Aggregate Supply
Changes in tax rates and tax allowances can have a direct and indirect effect
on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives
Capital investment
Enterprise /
Entrepreneurship
08:04
Inward migration
Human capital
spending
Tariffs import costs

36. Taxation and Aggregate Supply
Changes in tax rates and tax allowances can have a direct and indirect effect
on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives
Capital investment
Enterprise /
Entrepreneurship
08:04
Inward migration
Human capital
spending
Tariffs import costs

37. Taxation and Aggregate Supply
Changes in tax rates and tax allowances can have a direct and indirect effect
on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives
Capital investment
Enterprise /
Entrepreneurship
08:04
Inward migration
Human capital
spending
Tariffs import costs

38. Taxation and Aggregate Supply
Changes in tax rates and tax allowances can have a direct and indirect effect
on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives
Capital investment
Enterprise /
Entrepreneurship
08:04
Inward migration
Human capital
spending
Tariffs import costs

39. Taxation and Aggregate Supply
Changes in tax rates and tax allowances can have a direct and indirect effect
on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives
Capital investment
Enterprise /
Entrepreneurship
08:04
Inward migration
Human capital
spending
Tariffs import costs

40. Taxation and Aggregate Supply
Changes in tax rates and tax allowances can have a direct and indirect effect
on both short-run and long-run aggregate supply (SRAS and LRAS)
Work incentives
Capital investment
Enterprise /
Entrepreneurship
08:04
Inward migration
Human capital
spending
Tariffs import costs

41. Taxation and Research Investment
The patent
box offers a
10 per cent
tax rate on
patent profits
The UK government has introduced a “patent box”, which provides tax
incentives against future profits on drugs developed in the country
Britain’s main corporation tax rate is due to fall to 20 per cent by 2015, from
28 per cent in 2010 – this is a tax on business profits
08:04

42. Taxation and Investment – Shale Gas
"I want Britain to be a leader of the shale gas revolution because it has the potential
to create thousands of jobs and keep energy bills low for millions of people."
08:04

43. Taxation and Housing Supply
It is widely accepted that there is a chronic shortage of new housing in the UK
leading to deep problems of affordability.
The Royal Institute of
Chartered Surveyors (RICS)
has called upon the
Chancellor, George
Osborne, to provide VAT
incentives to boost house
building.
Besides a change in VAT, are there other tax
changes that might stimulate an expansion in
investment in new house-building?
08:04
The industry body says that
the tax system needs to be
used to provide more
incentives for the housing
development industry,
including the provision of
VAT for building
refurbishment and repair.

44. The Overall UK Tax Burden
The tax burden is measured by total tax revenues
measured as a share of GDP
08:04

45. Selected Indirect Tax Revenues
08:04

46. To what extent would tax reductions help to bring
about stronger growth in the UK economy?
To what extent
Requires good evaluation
Lots of uncertainty at the moment
Evaluate the point
you are making in
each paragraph!
08:04

47. To what extent would tax reductions help to bring
about stronger growth in the UK economy?
To what extent
Requires good evaluation
Lots of uncertainty at the moment
Tax reductions
1/ Which taxes might be cut?
2/ Consumer or business taxes?
Evaluate the point
you are making in
each paragraph!
08:04

48. To what extent would tax reductions help to bring
about stronger growth in the UK economy?
To what extent
Requires good evaluation
Lots of uncertainty at the moment
Tax reductions
1/ Which taxes might be cut?
2/ Consumer or business taxes?
Stronger growth
1/ Context – weak recovery
2/ Short term growth?
3/ Long term growth?
08:04
Evaluate the point
you are making in
each paragraph!

49. To what extent would tax reductions help to bring
about stronger growth in the UK economy?
To what extent
Requires good evaluation
Lots of uncertainty at the moment
Tax reductions
1/ Which taxes might be cut?
2/ Consumer or business taxes?
Stronger growth
1/ Context – weak recovery
2/ Short term growth?
3/ Long term growth?
Different tax cuts for short and
long term growth aims?
08:04
Evaluate the point
you are making in
each paragraph!

50. To what extent would tax reductions help to bring
about stronger growth in the UK economy?
Consumer spending
• Cuts in VAT or income tax to boost demand
Business investment
• Lower corporation tax to increase investment
Lower employment taxes
• Reduced national insurance taxes
Reductions in fuel / carbon taxes
• Lower costs for businesses, less inflation
08:04

51. To what extent would tax reductions help to bring
about stronger growth in the UK economy?
Consumer spending
• Cuts in VAT or income tax to boost demand
Business investment
• Lower corporation tax to increase investment
Lower employment taxes
• Reduced national insurance taxes
Reductions in fuel / carbon taxes
• Lower costs for businesses, less inflation
08:04
Low confidence – tax
cuts likely to be saved

52. Will tax cuts boost
demand?
Direct tax cuts and AD
General
Price Level
SRAS1
P2
P1
AD1
Y1
08:04
Y2
AD2
Real National
Output (Y)

53. To what extent would tax reductions help to bring
about stronger growth in the UK economy?
Consumer spending
• Cuts in VAT or income tax to boost demand
Business investment
• Lower corporation tax to increase investment
Lower employment taxes
• Reduced national insurance taxes
Reductions in fuel / carbon taxes
• Lower costs for businesses, less inflation
08:04
Low confidence – tax
cuts likely to be saved
Businesses might
invest overseas instead

54. To what extent would tax reductions help to bring
about stronger growth in the UK economy?
Consumer spending
• Cuts in VAT or income tax to boost demand
Business investment
• Lower corporation tax to increase investment
Lower employment taxes
• Reduced national insurance taxes
Reductions in fuel / carbon taxes
• Lower costs for businesses, less inflation
08:04
Low confidence – tax
cuts likely to be saved
Businesses might
invest overseas instead
Skills shortages limit
employment creation

55. To what extent would tax reductions help to bring
about stronger growth in the UK economy?
Consumer spending
• Cuts in VAT or income tax to boost demand
Business investment
• Lower corporation tax to increase investment
Lower employment taxes
• Reduced national insurance taxes
Reductions in fuel / carbon taxes
• Lower costs for businesses, less inflation
08:04
Low confidence – tax
cuts likely to be saved
Businesses might
invest overseas instead
Skills shortages limit
employment creation
Conflicts with
environmental policies

56. Lower taxes for businesses
General
Price Level
SRAS1
SRAS2
P1
P2
AD1
Y1 Y2
08:04
Real National
Output (Y)

57. Can tax changes drive LRAS higher?
LRAS1 LRAS2
General
Price Level
SRAS1
P1
AD2
AD1
Real National
Output (Y)
08:04
Y1
Y2
Y3

58. Good evaluation approaches
Tax cuts on their own are
insufficient in the current
UK economic context
Which tax cuts will boost
short term growth?
Which tax changes might
help long term
competitiveness?
Consequences for other
macro objectives?
08:04
Evaluate the point
you are making in
each paragraph!

59. Good evaluation approaches
Tax cuts on their own are
insufficient in the current
UK economic context
Which tax cuts will boost
short term growth?
Which tax changes might
help long term
competitiveness?
Consequences for other
macro objectives?
08:04
Evaluate the point
you are making in
each paragraph!

60. Good evaluation approaches
Tax cuts on their own are
insufficient in the current
UK economic context
Which tax cuts will boost
short term growth?
Which tax changes might
help long term
competitiveness?
Consequences for other
macro objectives?
08:04
Evaluate the point
you are making in
each paragraph!

61. Good evaluation approaches
Tax cuts on their own are
insufficient in the current
UK economic context
Which tax cuts will boost
short term growth?
Which tax changes might
help long term
competitiveness?
Consequences for other
macro objectives?
08:04
Evaluate the point
you are making in
each paragraph!

62. AS Macro Course Support
Get help from fellow
students, teachers and
tutor2u on Twitter:
#econ2
@tutor2u
@tutor2u-econ

63. Economics of Government Spending
Transfer Payments
Investment
Welfare Spending
08:04
Recurring spending (G)
Public Services
Public Sector Capital Spending

64. Economics of Government Spending
Transfer Payments
Investment
Welfare Spending
08:04
Recurring spending (G)
Public Services
Public Sector Capital Spending

65. Economics of Government Spending
Transfer Payments
Investment
Welfare Spending
08:04
Recurring spending (G)
Public Services
Public Sector Capital Spending

66. Economics of Government Spending
Transfer Payments
Recurring spending (G)
Investment
Welfare Spending
Public Services
Public Sector Capital Spending
• Total public (government) spending in the UK will be £745 billion in 2015/16
• This is 43.1% of GDP
• £50 billion or 7% will be capital spending
08:04

67. Main UK Departmental Spending (2013)
Department
£ billion
Work and Pensions
167,828
NHS (Health)
117,112
Education
66,954
Defence
37,338
Transport
17,043
Home Office
16,188
Communities and Local Government
15,410
Environment, Food and Rural Affairs
10,757
Culture, Media and Sport
9,519
Justice
8,505
International Development
5,923
Cabinet Office
5,722
Energy and Climate Change
08:04
3,141
Source: https://www.gov.uk/government/publications/publicexpenditure-statistical-analyses-2013

68. Main UK Departmental Spending (2013)
Department
£ billion
Work and Pensions
167,828
NHS (Health)
117,112
Education
66,954
Defence
37,338
Transport
17,043
Home Office
16,188
Communities and Local Government
15,410
Environment, Food and Rural Affairs
10,757
Culture, Media and Sport
9,519
Justice
8,505
Legal system
International Development
5,923
Includes overseas aid
Cabinet Office
5,722
Energy and Climate Change
3,141
08:04
Welfare spending
State education
Prisons, Policing etc.
Source: https://www.gov.uk/government/publications/publicexpenditure-statistical-analyses-2013

69. Welfare Benefits
• Welfare benefits provide a safety-net for people/families on low incomes
• Some benefits are universal whereas others are means-tested (linked to income)
Cash welfare benefits in 2012
were worth an average of:
£7,419 for each family in the
bottom 20% of the UK income
distribution
Welfare Cap
In 2010 the Government announced
an intention to cap total household
benefits at £500 per week for a family
and £350 per week for a single person
with no children from April 2013
(implementation was subsequently
delayed)
08:04

70. Economic Importance of Government Spending
Component
of
aggregate
demand
Essential
public
goods
08:04
Regional
economic
impact
Achieving
more
equity in
society

71. Economic Importance of Government Spending
Component
of
aggregate
demand
Essential
public
goods
08:04
Regional
economic
impact
Achieving
more
equity in
society

72. Economic Importance of Government Spending
Component
of
aggregate
demand
Essential
public
goods
08:04
Regional
economic
impact
Achieving
more
equity in
society

73. Economic Importance of Government Spending
Component
of
aggregate
demand
Essential
public
goods
08:04
Regional
economic
impact
Achieving
more
equity in
society

74. Government spending as % of GDP
Is there an optimum size of government
spending for an economy such as the UK?
“We are sticking to the task. But that doesn't
just mean making difficult decisions on public
spending. It also means something more
profound. It means building a leaner, more
efficient state. We need to do more with less.
Not just now, but permanently” David
Cameron, November 2013
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75. Government spending in real terms
The boom years for rising state spending have
come to an end – the Coalition government have
introduced a period of fiscal austerity with cuts
in government spending planned
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76. “If we don't get a grip on government
spending, there will be no growth.”
George Osborne, 2011
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77. “If we don't get a grip on government
spending, there will be no growth.”
George Osborne, 2011
“The danger of having no growth, or little
growth, for a long time is high; you get a
number of vicious cycles which come into
play…You're playing with fire when you
get to low growth rates”
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78. Government spending and taxation
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79. Discuss the effectiveness of cuts in government
spending as a means of meeting the
government’s macroeconomic objectives
Argument 1: Depends on where cuts are made
• Scrapping investment projects – job losses, impact on
potential GDP, negative multiplier effects
Argument 2: Depends on how deep cuts are
• Will other components of AD help to compensate? E.g.
Exports? Consumer spending?
Argument 3: Depends on external economic events
• Euro economy is in crisis?
• Government has already lost AAA credit rating despite cuts
in government spending
08:04

80. Discuss the effectiveness of cuts in government
spending as a means of meeting the
government’s macroeconomic objectives
Argument 1: Depends on where cuts are made
• Scrapping investment projects – job losses, impact on
potential GDP, negative multiplier effects
Argument 2: Depends on how deep cuts are
• Will other components of AD help to compensate? E.g.
Exports? Consumer spending?
Argument 3: Depends on external economic events
• Euro economy is in crisis?
• Government has already lost AAA credit rating despite cuts
in government spending
08:04

81. Government Spending and Jobs
What are the possible relationships between the rate of
unemployment and the level of government spending?
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82. Discuss the effectiveness of cuts in government
spending as a means of meeting the
government’s macroeconomic objectives
Argument 1: Depends on where cuts are made
• Scrapping investment projects – job losses, impact on
potential GDP, negative multiplier effects
Argument 2: Depends on how deep cuts are
• Will other components of AD help to compensate? E.g.
Exports? Consumer spending?
Argument 3: Depends on external economic events
• Euro economy is in crisis?
• Government has already lost AAA credit rating despite cuts
in government spending
08:04

83. AS Macro Course Support
Get help from fellow
students, teachers and
tutor2u on Twitter:
#econ2
@tutor2u
@tutor2u-econ

84. Recession and the Fiscal Deficit
• Global financial crisis +
deep recession  large
fall in tax revenues
T
• Higher government
spending
• Huge rise in fiscal deficit
• UK already had a deficit
before the recession
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G

85. The Economics of Budget Deficits
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86. Government borrowing
The budget deficit is the amount that the
government needs to borrow each year to
finance state spending
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87. The case for budget deficit reduction
• High debt threatens stability and recovery
• Government wants credibility in financial markets
• Higher future taxes will squeeze the private sector
• Inequitable to leave future generations with debt
• Doubts about effectiveness of stimulus policies
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88. Deficits and Debt
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89. Borrowing Money – Bond
Yields for the UK
On average, the loans used to finance
Britain’s national debt run for ten years.
When bonds expire, the Treasury has to
raise more money at the interest rate
demanded by international markets
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90. UK Government Bond Yields
Bond yield: the annual interest rate on debt
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91. Counter-arguments to fiscal austerity
• UK should take advantage of low
interest rates to fund crucial
infrastructure
• Economy remains depressed
and unemployment is high.
Spending needed to create jobs
• Sensible fiscal stimulus policies
are self-financing – they create
extra tax revenue
• Poor households and families
with children will bear the brunt
of austerity – it is making
inequality worse
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92. Debt Interest Payments
In 2011, the UK government was spending near
£1 billion each week in debt interest payments
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93. Resources for revision (click to access)
08:04

94. AS Macro Course Support
Get help from fellow
students, teachers and
tutor2u on Twitter:
#econ2
@tutor2u
@tutor2u-econ