Economics Department

Fiscal Policy week 1

Taxes, Spending and Demand Management

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1) Explain what  is meant by:

Direct Tax

Indirect Tax

Progressive Tax

Proportional Tax

Regressive Tax

Public Sector Net Cash Requirement

The National Debt

Balanced Budget

Automatic and Discretionary Stabilisers

The Poverty Trap                                                                                             10 marks

2)Read the following section on taxes and spending, answering the questions contained

Total public spending is expected to be around £519 billion this year, around £8,700 for every man, woman and child in the UK. It is set to rise to £549 billion in 2006-07 and to £580 billion in 2007-08.

Where taxpayers' money is spent
Total managed expenditure - £519 billion

a) What percentage of the whole is spent on:

(i)Social Security

(ii) Debt Interest

(iii) Education                                                                                       3 marks

b) Why does the above chart suggest that the Government should be concerned about the size of the national debt?                                                                   3 marks

c) With reference to the data, analyse why the Government has sought to hold down spending on unemployment benefit and the health service in recent years                                                                                                                                    5 marks

Where taxes come from
Total receipts - £487 billion

d) What percentage of all tax revenue comes from:

(i) Income Tax

(ii) VAT

(iii) Corporation Tax                                                                                         6 marks

e) In 1978 the top rate of income tax was 60% and the basic rate of VAT 8%. Today, the figures are 40% and 17.5%

(i)                  How would this have been likely to change the Government’s tax revenue?

(ii)                What would have been the effect on the progressive or regressive nature of the tax system?

(iii)               What would have been the likely impact on incentives to work?

Give reasons for your answers                                                              6 marks

3)

National

Income

                                                                                          Time

a)      Explain how the PSNCR is likely to change over the cycle shown above?    3marks

b)      Why does this occur?  2 marks

c)      Why does the Government not aim to balance the budget at all times?                          5 marks

d)      Explain the Keynesian argument that the Government should further increase the size of the Net Cash Requirement in a recession        5 marks

e)      If the Government was to increase spending in a recession, why might the eventual change in the Net Cash Requirement be smaller than the initial change?

3 marks

f) Why does the Government not use Fiscal Policy in this way any more?           8 marks

4) Using AD/AS analysis, explain with a diagram the probable impact of

(i)                  An increase in Government spending

(ii)                A decrease in direct tax rates

(iii)               An increase in indirect tax rates

On AD,AS,Output, Employment and the Price level                                          15 marks

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