4 5 government economic policy n.
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4.5 Government Economic Policy

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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