Fiscal Policy The big issue in fiscal policy is the decision by the Coalition government to introduce a period of fiscal austerity – i.e. Cutting the budget deficit through spending cuts and tax rises G>T = budget deficit
Taxation : What’s the total? Which are direct and which are indirect?
How much borrowing can the UK take? Government debt is rising but long term bond yields remain low Fiscal austerity as Coalition aims to cut the size of the budget deficit over the next five years – will the pain work? Accusations that Labour failed to ‘save for a rainy day’ in the good times
Structural Deficit “The structural deficit is the part of the deficit that would remain even if the economy were operating at its "full potential" (stripping out changes to tax revenue and welfare benefits during an economic cycle).”
The UK government can borrow money for 10 years at cheap interest rates (around 2%) – whereas the cost of borrowing for other countries is significantly higher – this gives the UK an advantage – has it been used well?
The case for budget deficit reduction High debt threatens stability and recovery Government wants credibility in financial markets Higher future taxes will squeeze the private sector Inequitable to leave future generations with debt Doubts about effectiveness of stimulus policies
Counter-arguments to fiscal austerity UK should take advantage of low interest rates to fund much needed infrastructure Economy is depressed and unemployment is high. Spending is needed to create jobs Sensible fiscal stimulus policies are self-financing – they create extra tax revenue over time Poor households and families with children will bear the brunt of austerity – it will make inequality worse
Fiscal Policy – Employment taxes e.g. Cuts in national insurance – Reduced taxes on lower-paid jobs – Incentives for green investment – Youth training guarantees – Fast-forwarding capital projects e.g. Transport – New house building – Revising deficit reduction plans (less austerity) Assess the policies that might be most effective in achieving faster economic growth in the UK over the next few years