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4.5 Government Economic Policy - PowerPoint PPT Presentation

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4.5 Government Economic Policy. Taxation. The government contributes greatly to economic growth through its own expenditure. To finance this spending, the government will raise money through taxation:

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  • The government contributes greatly to economic growth through its own expenditure. To finance this spending, the government will raise money through taxation:

    • Indirect Taxes – taxes places on expenditure, in others words, you pay these taxes depending on what you use. IE: VAT, customs duties placed on imported goods, excise duties (taxes placed on specific goods such as petrol, alcohol and tobacco)

    • Direct Taxes – taxes placed on incomes earned. IE: Income Tax, National Insurance, Corporation Tax.

    • Other Taxes – IE: Stamp duty (placed on the purchase price of a house); Council tax (charged on each house and varies according to the value of the property); Inheritance tax (paid on any inheritance earned when an estate passes on to someone else when an individual dies)

Government expenditure categories of spending
Government Expenditure (Categories of spending)

  • Social Protection – includes welfare payments paid to those in need. (Some are based on a person’s circumstances – Jobseeker’s Allowance, others are paid regardless of status – Child benefits)

  • Health – NHS, 2nd largest component of gov’t spending, as UK population is ageing, the demands on NHS are likely to rise in the future.

  • Other categories: Transport, Education, Defence, Debt interest, Public order and safety, Environment, Agriculture, Employment and training . . .

Fiscal policy
Fiscal Policy

  • Decisions made by the government on government expenditure and taxation

    • As governments spend large amounts in the economy, changes in government expenditure have a major impact on economic performance and their ability to reach their economic objectives

    • High expenditure means taxes are very significant in funding this expenditure. Therefore changes in taxation will have a significant effect on the performance of the economy.

The effects of fiscal policy
The Effects of Fiscal Policy

  • Changes in the level of government spending, and changes in the level of taxation, will affect each of the government’s economic objectives:

Monetary policy
Monetary Policy

  • Decisions which control the supply or cost of money.

    • Involves changes in interest rates which represent the cost of borrowing money.

    • Is set by the Bank of England (UK’s central bank)

    • Interest rates are used to control inflation and economic growth

How does monetary policy
How does Monetary Policy . . .

  • Control Inflation?

  • Control Growth?

Supply side policies
Supply-side policies

  • Economic growth can be increased with more spending.

  • However, if spending rises quicker than the rate at which output increases, it will lead to inflation. (ie: there is a shortage of items to purchase)

  • Therefore, it is important that an economy can produce more output over time.

  • Policies to raise the rate of growth of output without boosting spending are known as SUPPLY-SIDE POLICIES.

  • Supply-side policies allow economies to grow faster with fewer risks of inflation.

What are supply side policies
What are supply-side policies?

  • Education and training – increasing the quality and quantity of education and training should make people more productive, this higher productivity should lead to higher national output.

  • Competition – encouraging competition between businesses should lead to higher output levels and lower prices because of the pressure between businesses to retain customers (ie: aid for small businesses, privatisation, deregulation)

  • Labour market policies – decreasing direct taxes provides workers with incentives to rejoin the workforce, and for firms to recruit more workers, a reduction in trade union power also encourages firms to recruit more workers