Fiscal Policy involves the use of government spending, direct and indirect taxation in order to achieve macro-economic objectives.

Changes in fiscal policy affects both aggregate demand and aggregate supply.

Fiscal Policy also includes supply side policies

Public Sector Businesses

Public Sector Businesses are owned and operated by the government. The private sector is privately owned.
Examples:

  • NHS - largest employer
  • Met Office
  • Channel 4
  • Network international
  • Royal Mail (Only 30%)
  • Eurostar

UK Government spending

  • Social protection - £231 billion
  • Healthcare - £141
  • Education - £99 billion
  • Defence - £45 billion

Sources of Income

  • Income tax - £170 billion
  • National Insurance - £115 billion
  • VAT - £133 billion

Spending

Current Spending - SR Spending

Spending in order to keep day-to-day things running:

  • Paying NHS Workers
  • Drugs used in healthcare
  • Road maintenance
  • Army logistics supplies

Capital Spending - LR Spending

Spending on new public infrastructure.

  • Construction of new motorways
  • New equipment in the NHS
  • Flood defence schemes
  • Extra defence equipment

Earning

Direct tax is levied on income, wealth and profit.

  • Income tax
  • Inheritance tax
  • National Insurance Contributions

Indirect taxes are taxes on spending.

  • Duties on fuel, cigarettes and alcohol
  • VAT

Crowding Out

The crowding out view is that a rapid increase in government spending / borrowing may steal scarce productive resources from the private sector, and end up in the public sector, where there is lower efficiency. This view is a classical view.

  • To cover budget, the government borrows money
  • To do this it sells bonds to private sector, which raise its revenue.

In order to get institutions to buy bonds, it might mean having to raise the interest rate.

  • But raising the interest rate increases saving / reduces investment.
  • This means more firms will save and lend their money since interest rates are higher
  • But also, the cost of borrowing increases for firms, meaning it is harder for them to invest, so investment reduces

AD = C + I + G + (X-M)

Government spending increases, but investment decreases, so no actual growth in AD occurs.