Fiscal PolicyFiscal Policy

• By the end of this session, you:By the end of this session, you:– Must know the key terms associated with Must know the key terms associated with

fiscal policy.fiscal policy.– Should understand the difference between Should understand the difference between

expansionary and contractionary fiscal expansionary and contractionary fiscal policy.policy.

– Could be able to predict whether or not a Could be able to predict whether or not a budget deficit poses a problem.budget deficit poses a problem.

Match the DefinitionsMatch the Definitions• The government’s annual The government’s annual

announcement of changes to its announcement of changes to its planned levels of spending and planned levels of spending and taxationtaxation

• The proportion paid in tax falls as The proportion paid in tax falls as income increases.income increases.

• People or firms with the same People or firms with the same income and/or financial income and/or financial circumstances pay the same circumstances pay the same amount of tax.amount of tax.

• When taxes are earmarked for a When taxes are earmarked for a specific purpose eg Labour 1990s specific purpose eg Labour 1990s (education)(education)

• Taxes should be linked to the Taxes should be linked to the benefits received by taxpayers.benefits received by taxpayers.

• The proportion of income paid in tax The proportion of income paid in tax stays the same as income stays the same as income increases.increases.

• The characteristics of a ‘good tax’ The characteristics of a ‘good tax’ (Adam Smith).(Adam Smith).

• The amount people or firms pay is The amount people or firms pay is based upon their ability to pay.based upon their ability to pay.

• Modern list of characteristics of a Modern list of characteristics of a ‘good tax’.‘good tax’.

• The proportion paid in tax increases The proportion paid in tax increases as income increases.as income increases.

• Proportional taxProportional tax

• Principles of taxationPrinciples of taxation

• Benefit principleBenefit principle

• Canons of taxationCanons of taxation

• Progressive taxProgressive tax

• The BudgetThe Budget

• HypothecationHypothecation

• Horizontal equityHorizontal equity

• Vertical equityVertical equity

• Regressive taxRegressive tax

UK DebtUK Debt

Debt Clock

1818thth November 2011 November 2011

Find this outFind this out

1.1. What is a balanced budget?What is a balanced budget?2.2. What is the difference between What is the difference between

expansionary and contractionary fiscal expansionary and contractionary fiscal policy?policy?

3.3. Use a diagram to show the difference Use a diagram to show the difference between a cyclical deficit and a cyclical between a cyclical deficit and a cyclical surplus.surplus.

4.4. Explain one example of an automatic Explain one example of an automatic stabiliser.stabiliser.

5.5. Choose two reasons why a budget deficit Choose two reasons why a budget deficit may pose a problem:may pose a problem:

1.1. Explain each reasonExplain each reason2.2. Evaluate each reasonEvaluate each reason