What fiscal policy is
- Fiscal policy is the use of government spending and taxation to influence the economy. It is decided by the government (the Chancellor of the Exchequer presents the Budget).
- Direct taxes are on income and wealth (income tax, corporation tax). Indirect taxes are on spending (VAT at 20% standard rate, excise duties).
Expansionary and contractionary policy
- Expansionary fiscal policy: more spending or lower taxes. It boosts demand, growth and jobs, but may raise inflation and borrowing.
- Contractionary fiscal policy: less spending or higher taxes. It reduces demand and inflation, but may slow growth.
The budget
- A budget deficit is when government spending is greater than tax revenue in a year; the government borrows to fill the gap.
- A budget surplus is when revenue is greater than spending.
- The national debt is the total amount the government owes from past borrowing. Interest on the debt has an opportunity cost.
Main areas of spending
- In the UK, the biggest areas are social protection (pensions and benefits) and health, followed by education.
Key terms
- Fiscal policy
- Using government spending and taxation to influence the economy.
- Direct tax
- A tax on income or wealth, such as income tax.
- Indirect tax
- A tax on spending, such as VAT.
- Budget deficit
- When government spending is greater than tax revenue in a year.
- Budget surplus
- When tax revenue is greater than government spending.
- National debt
- The total amount the government owes.
- Expansionary fiscal policy
- Increasing spending or cutting taxes to boost the economy.