Definitions / Intro
Current Spending - Spending to keep day to day things running, such as paying NHS staff
Capital Spending - Spending on new public infrastructure and investments.
Fiscal policy involves the use of government spending, direct and indirect taxes to affect the achievement of macro objectives.
Analysis
Subsidies
- Allow businesses to expand
- AD shifts right
- Firms can hire more people - unemployment down
- ??? spending
- Economy grows.
- Relate to diagram.
Reduce direct taxes - e.g Income Tax
- More disposable income
- AD shifts right
- unemployment down
- Economic growth
Reduce indirect taxes - e.g VAT
- SRAS shifts right
- AD expands due to SRAS shifting.
- Economic growth
- Unemployment down
Supply side policy - e.g Infrastructure Investment
- LRAS shifts to the right
- Economy grows
- Unemployment down
- Current account improves since the UK will be more competitive with other countries
- Inflation decreases since costs of production decrease
Evaluation
Expensive
- High opportunity costs
- Government debt
Takes a long time
- Especially supply side policies like education
If interest rates are high
- People will save rather than spend
Judgements
- Depends on where the AD curve is on the keynesian LRAS curve.
(You don't need to draw this many AD lines in the exam)
If there is no spare capacity, then policies that affect AD, such as cutting direct tax, will be ineffective.
You could also mention:
- depends on interest rate
- amount of national debt
- type of fiscal policy