- Automatic stabilisers: when government spending or taxation vary without direct
government decision-making
- occurs over the course of the economic cycle
- built into the means-tested welfare support
- progressive tax bands
- Discretionary fiscal policy: deliberate, direct alteration of government expenditure or
taxation
- designed to achieve its economic objectives
- determined in budget
positive output gap = less GS/more tax revenues with automatic stabilisers
negative output gap = more GS/less tax revenues with automatic stabilisers
discretionary fiscal policy can occur at any point on trade cycle
Budget deficit: government spending exceeds tax revenue
Budget surplus: when tax revenue exceeds government spending
- during a downturn/recession, GS for public sector increases
National debt: accumulated deficit built over many years
- if the government runs a budget surplus, they will use the extra money to pay off the
national debt
- at the end of the financial year, a deficit is added to the national debt, increasing it
Fiscal Austerity = measures to reduce the government budget deficit and size of the national
debt via:
- spending cuts
- reduce spending on unemployment benefits (JSA)
- lower minimum wage (controversial as wages are sticky downwards)
- reduce spending on social security/welfare
- poorest in society have highest MPC (unable to save; forced to spend
majority of their income on necessity’s) -> cut in their benefits reduces
AD = negative multiplier effect = reduced real = recession (2
consecutive quarters of negative growth)
- tax rises
- increase VAT
- increase corporation tax
- increase income tax
- = decreased disposable income + confidence = decreased
consumption = reduced AD = reduced GDP = recession
- BUT, increased income tax rates could raise confidence: can signal to
investors that government can repay its debts, which raises the credit
rating
stabilises the country's debt-to-GDP ratio
government decision-making
- occurs over the course of the economic cycle
- built into the means-tested welfare support
- progressive tax bands
- Discretionary fiscal policy: deliberate, direct alteration of government expenditure or
taxation
- designed to achieve its economic objectives
- determined in budget
positive output gap = less GS/more tax revenues with automatic stabilisers
negative output gap = more GS/less tax revenues with automatic stabilisers
discretionary fiscal policy can occur at any point on trade cycle
Budget deficit: government spending exceeds tax revenue
Budget surplus: when tax revenue exceeds government spending
- during a downturn/recession, GS for public sector increases
National debt: accumulated deficit built over many years
- if the government runs a budget surplus, they will use the extra money to pay off the
national debt
- at the end of the financial year, a deficit is added to the national debt, increasing it
Fiscal Austerity = measures to reduce the government budget deficit and size of the national
debt via:
- spending cuts
- reduce spending on unemployment benefits (JSA)
- lower minimum wage (controversial as wages are sticky downwards)
- reduce spending on social security/welfare
- poorest in society have highest MPC (unable to save; forced to spend
majority of their income on necessity’s) -> cut in their benefits reduces
AD = negative multiplier effect = reduced real = recession (2
consecutive quarters of negative growth)
- tax rises
- increase VAT
- increase corporation tax
- increase income tax
- = decreased disposable income + confidence = decreased
consumption = reduced AD = reduced GDP = recession
- BUT, increased income tax rates could raise confidence: can signal to
investors that government can repay its debts, which raises the credit
rating
stabilises the country's debt-to-GDP ratio
