Fiscal policy

Fiscal policy is an instrument of demand management which is used to influence the level of economic activity in an economy through the control of taxation and government expenditure.

The government can use a number of taxation measures to control aggregate demand or spending: direct taxes on individuals (income tax) and companies (corporation tax) can be increased if spending has to be reduced. Spending can also be reduced by increasing indirect taxes: an increase in the VAT on all products or excise duties on particular products will result in lower purchasing power.

The government can change its own expenditure to affect spending levels as well: a cut in purchases of products or capital investment by the government can reduce total spending in the economy.

If the government is to increase spending, it creates a budget deficit, reducing taxation and increasing its expenditure.

A decrease in government spending or an increase in taxes reduces aggregate demand to avoid inflation. By contrast, an increase in government spending and/or decrease in taxes - an injection into the circular flow of national income - stimulates aggregate demand and creates additional jobs to avoid unemployment.

In practice, however, the effectiveness of fiscal policy can be reduced by a number of problems. Taxation rate changes, particularly changes in income tax, take time to make. Considerable proportion of government expenditure on, for example, schools, hospitals and defense cannot easily be changed without lengthy political lobbying.

Vocabulary:

aggregate demand ['xgrIgIt dI'mRnd] – совокупный спрос

avoid [q'vOId] v. – избегать

budget deficit ['bAGIt 'defIsIt] – бюджетный дефицит

corporation tax ["k²pq'reISqn txks] – корпоративный налог

create [krI'eIt] v. – создавать

expenditure [Ik'spendICq] n. – расходы

fiscal policy ['fIskql 'pPlIsI] – налоговая политика

influence ['InflVqns] v. – оказывать влияние

injection [In'GekSqn] n. – вливание

lengthy ['leNTI] a. – длительный, продолжительный

measure ['meZq] n. – мера, система мер

purchasing power ['p´CIsIN 'paVq] – покупательная способность

Answer the following questions:

1. What is the effect of reduced aggregate demand in an economy?

2. How can aggregate demand be reduced?

3. What is the effect of higher aggregate demand?

4. How can aggregate demand be increased?

5. What can decrease the effectiveness of fiscal policy?

Э, М, ИНН, ПО (IV семестр)