Fiscal Policy

The Fiscal policy is the use of government spending and taxation to influence the components of economic activity such as output and employment. There are three types of government spending - capital, current and transfer.

Public spending:

Capital spending - this is spending on items which benefit the economy for more than one year such as buildings, roads, and factories.
Current spending - this is spending on items which benefit the economy for less than one year such as salaries for public sector workers.
Transfer spending - this is spending on welfare such as benefits e.g. disability or unemployment, or pensions.

Higher government spending can have a positive multiplier effect because it is an injection into the circular flow.

Government taxation:

Direct taxes on income and wealth such as - Income tax, National insurance, Corporate tax, Council tax, Inheritance tax etc.
Indirect taxes on consumer spending such as - VAT, excise taxes (particularly on demerit goods), road tax, fuel tax etc.

Budget deficit vs budget surplus

Each year in March, the Chancellor of the Exchequer will present the fiscal budget which sets out the spending, taxing and borrowing plans of the government for the next financial year.

Fiscal surplus means tax revenues exceed governement spending. This will have a negative multiplier effect on the economy bwcause withdrawals exceed injections.
Fiscal deficit mans government spending exceeds tax revenues. This will have a postive multipier effect on the economy because injections exceed withdrawals.

An expansionary fiscal policy means the government will spend more and tax less leading to a fiscal deficit.
A contractionary fiscal policy means the government will spend less and tax more leading to a fiscal surplus.
Austerity the result of the government applying a contractionary fiscal policy to ultimately reduce the budget deficit.

The macroeconomic impact of the Fiscal policy

	Created by Amardeep Kumar over 9 years ago

A-levels Economics module 2 Note on Economics - Module 2 - Unit 4, created by Amardeep Kumar on 16/05/2015.