4.5 Government Economic Policy

1. 4.5 Government Economic Policy

2. Taxation • 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)

3. 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 . . .

5. 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.

6. 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:

7. 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

8. How does Monetary Policy . . . • Control Inflation? • Control Growth?

9. 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.

10. 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