What’s the link to Macro Ec?

Quick MC practice … you have 5 mins to complete these ….

Which one of the following is an example of fiscal policy? A decision by the government to

A. Decrease the exchange rate.

B. Raise the minimum wage.

C. Increase its budget surplus.

D. Reduce the rate of interest.

A current account deficit on the UK’s balance of payments means that generally

A. The total value of imports exceeds the total value of exports.

B. Government expenditure exceeds government revenue.

C. The value of imports of services is less than the value of exports of services.

D. The volume of imports of goods and services exceeds the volume of exports of goods and services.

In the short run, an increase in the government’s budget deficit is most likely to reduce

A. Imports.

B. Unemployment.

C. Interest rates.

D. Inflation.

Demand-pull inflation is most likely to be caused by

A. Total spending exceeding productive capacity.

B. An increase in output.

C. A rise in raw material prices.

D. A rise in interest rates.

Answers……

Which one of the following is an example of fiscal policy? A decision by the government to

A. Decrease the exchange rate.

B. Raise the minimum wage.

C. Increase its budget surplus.

D. Reduce the rate of interest.C

A current account deficit on the UK’s balance of payments means that generally

A. The total value of imports exceeds the total value of exports.

B. Government expenditure exceeds government revenue.

C. The value of imports of services is less than the value of exports of services.

D. The volume of imports of goods and services exceeds the volume of exports of goods and services.

A

In the short run, an increase in the government’s budget deficit is most likely to reduce

A. Imports.

B. Unemployment.

C. Interest rates.

D. Inflation.B

Demand-pull inflation is most likely to be caused by

A. Total spending exceeding productive capacity.

B. An increase in output.

C. A rise in raw material prices.

D. A rise in interest rates.

A

What will the rise in unemployment in Bath have on…Families

Disposable income

Less savings

Stress & health

Reduce employability – reduce skills

Local area

Fall in sales for local business

Crime

People want to move out of area

Fall in house prices – further reduce wealth effect!

Govt

Fall in tax revenue

Increase in tax rates

Greater deficit

More structural unemployment

Opp cost of New Deal payments from ed & training

Economy

Inward shift of AD & AS

Reduces our competitiveness

Fall in productivity

Recap…

• What is the difference between government deficit & government debt?

• What is PSNCR? • Public Sector Net Cash Requirement.• What is it used for?

• How does the government raise the money to pay for this?

UK debt & deficit

• In the financial year 2009/10 the UK recorded general government net borrowing of £159.8 billion, which was equivalent to 11.4 per cent of gross domestic product (GDP).

• At the end of March 2010 general government debt was £1000.4 billion, equivalent to 71.3 per cent of GDP.

UK debt & deficit

• The Maastricht Treaty's Excessive Deficit Procedure sets deficit and debt reference levels of 3 per cent and 60 per cent respectively for all EU countries.

Fiscal Policy & automatic stabilisers!

What does this mean?

The collapse in tax revenues

• Tax revenues tend to fall during a recession

– More people unemployed – less money from income tax

– Squeeze on business profits – less revenue from corporation tax

– Decline in consumer spending – hits income from VAT and duties

– Drop in average house prices – affects revenue from stamp duty

– Possible rise in tax avoidance and tax evasion

– Cuts in bonuses and other payments e.g. overtime pay

• The latest figures for the government show a big drop in tax receipts

Diagram practice….

Use an Keynesian AD & AS diagram with unemployment

Show the impact of a cut in govt spending

Would the impact be any different if the economy was at full employment?

Should we be worried about a reduction in tax take?

• No– In a recession, tax revenues fall automatically – this is part of what is known

as the automatic stabilisers

– Some of the reduced tax revenue comes from decisions by the government to cut taxes to boost the economy

– Some comes from lower oil/petrol prices

• Yes– This is a sign of an economy heading into a very deep recession

– The drop in revenues is causing a huge rise in the budget deficit - public sector net borrowing is now almost three times higher than at the same stage last year

– The result will be an enormous deficit which will required either higher taxes in the future or cut-backs in government spending

– Some of the tax cuts introduced have been ineffective in increasing AD

Spending Review

20th Oct 2010

What did the newspapers say?

Watch out

• The Chancellor will deliver his Budget on Wednesday 23 March 2011

• What will it include?

Your task

• http://budgetresponsibility.independent.gov.uk/d/obr_briefing1.pdf

• You will be given a TAX to research

• Create a POSTER to explain • what the tax is…• how much tax revenue it generates• What problems the tax creates for

different stakeholders in the economy

12 to do:Income Tax

NI ContributionVAT

CorporationOil / GasFuel duty

Business ratesTobaccoAlcohol

Vehicle exciseCapital GainStamp duty

Also on P drive / BS _ Ec

AS Ec folder/ OBR briefing1

Homework

• Fiscal Policies past paper Q’s

1. What is meant by a budget deficit ?(2)

2. Using aggregate demand and supply analysis, assess the likely long-run impact on the UK economy of the planned increase in health and education spending. (8)

• 10 marks in total