Government Spending and Taxation FISCAL POLICY FISCAL POLICY

Government Spending and Taxation FISCAL POLICY

FISCAL POLICY • Fiscal Policy is the Government’s policy on two things • 1. Tax Revenues • 2. Government Spending • Essentially Governments raise money through taxation and then spend it on the Public Sector of the Government i. e. Health Care, Education, Defence, The Police, Roads etc

The next two slides show two pie charts • The first shows where the Government plans to spend its’ money in the financial year 2020 -21. • You can see that TOTAL GOVERNMENT SPENDING = £ 928 bn • The second shows the sources of Government Tax Revenue i. e where the Government plans to get its’ money from in the financial year 2020 -21. • You can see that TOTAL TAX REVENUE = £ 873 bn. • Thus you can see that TOTAL GOVERNMENT SPENDING is £ 55 bn more than TOTAL TAX REVENUE. • AND THIS FORECAST WAS PRE-CORONA VIRUS. THE ACTUAL 2020 -21 DEFICIT COULD BE MORE LIKE £ 250 BN

Direct Taxation and Indirect Taxation • Direct Taxes are taxes on Income • Indirect Taxes are taxes on spending • Direct Taxation is a tax in peoples incomes e. g. Income Tax • Corporation Tax is also a direct tax as it’s a tax on a firm’s profits • Indirect Taxation are taxes on people’s spending like VAT and Excise duties.

The Impact of Increasing Taxation in Firms As you saw from a previous slide there are many forms of taxation. If the Government were to increase INCOME TAX then peoples take home pay would fall thus their disposable income would fall and demand for some but not all goods and services would fall. e. g. Consumer spending on necessities like bread, milk, petrol and electricity would not fall but spending on luxury items like cars, foreign holidays and new furniture would. The reverse would be true if income taxes fell.

The Impact of Increasing Taxation in Firms • If the Government increases an indirect tax like VAT then the prices of goods with VAT on them will rise and demand for them might fall. • Firms that produce VAT rated goods may then see a fall in demand for their products and so their revenues and profits may decline. • If VAT was cut then the opposite might happen

The Impact of Increasing Taxation in Firms • If the Government increases Corporation Tax then firms will pay a higher level of tax on their profits. • This leaves them with less profit to invest in new factories and new machinery. • It may also result in them cutting dividend payments which will leave shareholders unhappy and they may sell their shares and their share price may decline leaving them vulnerable to take over. • If the Government decreases corporation tax then the opposoite might occur.