Fiscal policy
Introduced| English | Meaning |
|---|---|
| fiscal policy/ˈfɪskl ˈpɒlɪsi/ | Government decisions about taxation and spending used to influence economic activity. |
| government spending/ˈɡʌvənmənt ˈspendɪŋ/ | Expenditure by government on goods, services, transfers and other activities. |
| taxation/tækˈseɪʃn/ | The collection of compulsory payments by government from individuals or organisations. |
| budget balance/ˈbʌdʒɪt ˈbæləns/ | budget balance |
| budget surplus/ˈbʌdʒɪt ˈsɜːpləs/ | The amount by which revenue exceeds spending over a given period. |
| budget deficit/ˈbʌdʒɪt ˈdefɪsɪt/ | The amount by which spending exceeds revenue over a given period. |
| indirect tax/ɪndaɪˈrekt tæks/ | A tax on spending or transactions, usually collected by a seller and included in the price paid by a buyer. |
| direct tax/daɪˈrekt tæks/ | A tax imposed directly on a person's or organisation's income, profit or wealth. |
| average tax rate/ˈævrɪdʒ tæks reɪt/ | average tax rate |
| progressive tax/prəˈɡresɪv tæks/ | A tax for which the proportion of income paid rises as income increases. |
| proportional tax/prəˈpɔːʃənl tæks/ | A tax that takes the same fraction of every income. |
| regressive tax/rɪˈɡresɪv tæks/ | A tax that takes a larger fraction of a small income than of a large one. |
| expansionary/ekˈspænʃənəri/ | Describing an economic policy intended to increase aggregate demand or economic activity. |
| contractionary/kənˈtrækʃənəri/ | Describing an economic policy intended to reduce aggregate demand or restrain economic activity. |
Will a new road create jobs or push up prices?
- A government plans a new road while construction workers and machines are idle. Its orders may create work now and improve transport later. The result differs if builders are already fully occupied.
- Fiscal policy 财政政策 uses changes in government spending 政府支出 and taxation 税收 to influence the economy. Identify the change, follow its effect on spending and production, then judge the limits and who is affected.
Fiscal policy uses:
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Fiscal policy works through the government budget.
Calculate a balance and name its sign
- A government budget sets planned spending against revenue for a period. In our simplified examples, revenue is tax revenue. Budget balance 预算平衡 = revenue − spending: positive means a budget surplus 预算盈余; negative means a budget deficit 预算赤字. Equal amounts give a balanced budget.
- If annual tax revenue is £47 billion and spending £52 billion, the balance is −£5 billion: a deficit of £5 billion. A deficit needs financing, often borrowing. It is a flow for that year, not the accumulated stock of government debt. State whether an answer is the signed balance or the positive size of a deficit.
Revenue minus government spending gives the budget ______, which can be positive, negative or zero.
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The budget balance is the signed result. A negative balance is a deficit; a positive balance is a surplus.
Annual government spending is £96 billion and tax revenue £83 billion. Enter the positive size of the deficit (£ billion).
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Spending exceeds revenue by 96 − 83 = 13. The deficit amount is £13 billion; the signed balance is −£13 billion.
Annual tax revenue is £145 billion and spending £132 billion. What is the size of the surplus (£ billion)?
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Revenue − spending = 145 − 132 = 13, a £13 billion surplus.
Tax revenue is £62 billion and government spending £70 billion. Using revenue minus spending, enter the signed budget balance (£ billion).
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62 − 70 = −8. This is a deficit of £8 billion.
Explain why government spends
- Spending on health and education provides services and can improve people's ability to work. Roads and other infrastructure can lower transport costs and improve productive capacity over time. Benefits can support household incomes and reduce hardship, although recipients may save part of them.
- Spending has an opportunity cost: funds used for a road cannot also fund the same amount of hospital care. More borrowing may create future interest costs. A policy's value depends on the project's usefulness, available workers, financing and the time needed to deliver it.
Keep direct and indirect taxes separate
- A direct tax 直接税 is based on income or profit, such as income tax or corporation tax. An indirect tax 间接税 is imposed on spending on goods and services, such as a sales tax or a tax on fuel. These labels describe what is taxed, not just who sends the payment to government.
- An indirect tax may raise the consumer price and reduce sales if firms pass it on. Firms may instead absorb part of it in lower profit, depending on competition and demand. Tax changes affect consumers' buying power, workers' incomes, firms' costs and government revenue; the burden is not always passed on completely.
Which is a direct tax?
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Income tax is based on income. Direct/indirect classifies the tax base; it does not say whether the average rate rises or falls with income.
Compare the share of income paid
- Average tax rate 平均税率 = tax paid ÷ income × 100%. A progressive tax 累进税 takes a higher share as income rises: £2,000 on £20,000 is 10%, while £6,000 on £40,000 is 15%. A proportional tax 比例税 keeps the share unchanged; at 10%, those two incomes pay £2,000 and £4,000.
- A regressive tax 累退税 takes a lower share as income rises. A fixed £400 annual payment is 2% of £20,000 but 1% of £40,000. A higher tax amount does not by itself prove a tax is progressive. Direct/indirect and progressive/regressive/proportional answer different questions.
The vertical axis is an average tax rate, not the total tax paid.
A person earns £24000 in a year and pays £3600 in tax. What is the average tax rate (%)?
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£3600 ÷ £24000 × 100 = 15%. Use income, not tax, as the denominator.
A hypothetical proportional income tax takes 18% of an income of £50000. What is the tax payment (£)?
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£50000 × 0.18 = £9000. A constant rate can still give a larger money payment at a higher income.
A household with annual income £5000 pays a fixed annual tax of £200. What percentage of its income is this?
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£200 ÷ £5000 × 100 = 4%. The same £200 is only 1% of £20000, so this fixed payment is regressive across those incomes.
An income tax takes an average 10% at a low income and 20% at a higher income. Which pair of labels fits?
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Income is the tax base, so it is direct. The average income share rises, so it is progressive. The classifications answer separate questions.
Connect tax purposes to consequences
- Tax can raise revenue for services, redistribute income, reduce total demand, discourage harmful products, reduce imports or encourage less pollution. For example, taxing a polluting fuel may encourage cleaner alternatives, but demand may respond little if users have no practical substitute.
- Progressive income tax can reduce differences in after-tax income, especially alongside support for poorer households. Higher taxes may also weaken some incentives to work or invest. A tax rate rise does not guarantee a proportional revenue rise: spending, output, avoidance and the tax base may change.
Two people earn £12000 and £48000 before tax. Their income-tax payments are £1200 and £9600. Calculate both average rates and the incomes left after tax. Explain how this pattern can support redistribution, then discuss one limit or cost.
Use the figures and stated assumptions, explain the causal link and qualify the judgement with relevant conditions.
Trace an expansionary change with conditions
- Expansionary 扩张性的 fiscal policy raises government spending and/or cuts taxes, with other measures unchanged. Extra purchases can raise firms' orders; an income-tax cut leaves households more income after tax, some of which may be spent. Greater demand may raise output and jobs when firms have spare capacity.
- The effect can be weaker if households save the tax cut, spend on imports, or firms lack the skills and materials to expand. Near capacity, prices may rise more than output. Infrastructure and training can improve supply later, but take time; a larger deficit is not an automatic proof that a deliberate expansionary policy was introduced.
With other budget measures unchanged, an expansionary fiscal change involves:
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More spending or lower taxes can support demand, but saving, imports, confidence and capacity affect the size of the response.
Initially revenue is £150 billion and spending £160 billion. Assume a policy reduces revenue by £3 billion and raises spending by £8 billion, with no other changes. What is the new positive deficit amount (£ billion)?
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New revenue = 147; new spending = 168. Deficit = 168 − 147 = 21 (£ billion), up from 10.
An annual income-tax cut leaves a worker £500 more income after tax. The worker saves £350 and spends the rest. Calculate the extra consumption and explain why a government cannot assume every £1 of tax cuts creates £1 of extra domestic demand or new jobs.
Use the figures and stated assumptions, explain the causal link and qualify the judgement with relevant conditions.
Trace a contractionary change and its costs
- Contractionary 紧缩性的 fiscal policy cuts government spending and/or raises taxes, with other measures unchanged. Lower demand may reduce demand-pull inflation, but can also reduce firms' sales, output and employment. Cutting useful services can harm households and future capacity.
- A rise in an indirect tax can initially raise consumer prices if passed on, even while reducing spending power. Weak tax receipts during a recession can also widen a deficit without any new tax-rate cut. Judge the policy changes and economic conditions, rather than labelling every deficit as expansionary or every tax increase as an instant fall in prices.
Which instrument and direction?
Classify each change, with all other budget measures unchanged.
A general cut in taxes, with other budget measures unchanged, is a contractionary fiscal change.
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False. A tax cut is generally an expansionary change. Whether demand and output actually rise depends on how households and firms respond.
Tax revenue falls during a recession because incomes fall. Tax rates and planned government spending are unchanged. What can be concluded from a larger deficit alone?
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The budget can change as the economy changes. Inspect actual tax/spending decisions before identifying a deliberate policy change.
Use the calculation to support a judgement
- Use the same period and units. Calculate revenue minus spending, name deficit/surplus/balance, and separate a one-period flow from accumulated debt. For taxes, compare percentages of income as well as amounts; direct/indirect is a different classification.
- Link the policy to an aim and a causal chain. Then explain one condition, affected group, cost or delay that could change the result. The best choice depends on demand, capacity, the source of inflation and how people respond.
Government spending is 40 and tax revenue 25, in the same units and period. Give the signed budget balance and name the deficit or surplus. If spending then increases with other measures unchanged, what kind of fiscal change is that?
State the sign convention and distinguish the negative balance from the positive size of the deficit.
Review the same figures: spending 40 and tax revenue 25. Which budget description is correct?
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Spending is 15 above tax revenue.
Country A has high unemployment, weak spending and idle factories. Country B has rapidly rising prices, strong spending and firms near full capacity. Recommend a fiscal direction for each. Explain one benefit and one limitation or cost of each choice, and why a new road’s spending and capacity effects may occur at different times.
Use the figures and stated assumptions, explain the causal link and qualify the judgement with relevant conditions.