Macroeconomic aims, the government budget and taxation

Last time

Before we start: last time, in Unemployment, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

What governments aim for

Microeconomics looks at one market. Macroeconomics looks at the whole economy at once. Every government has a short list of aims for the whole economy. To reach them it spends and it taxes, through its budget. This lesson covers the aims, the budget and the taxes.

The five macroeconomic aims

Economic growth: a steady rise in the output of goods and services, measured by real GDP. Full employment, or low unemployment. And price stability: low and stable inflation. Balance of payments stability: no long-lasting deficit on the current account. And redistribution of income: a fairer share for the poor.

Why each aim matters

Growth raises incomes and living standards. Low unemployment means people earn, and the economy produces on its PPC. Stable prices protect what money can buy, and let firms plan. A stable balance of payments avoids heavy borrowing from abroad. Redistribution reduces poverty and inequality.

When aims conflict

Growth and stable prices: rapid growth means spending rises fast, and if output cannot keep up, prices rise. Full employment and stable prices: when almost everyone has a job, firms compete for workers and wages, then prices, rise. Growth and the balance of payments: higher incomes mean more spending on imports, which can push the current account into deficit.

The government budget

The budget is the government's plan for its revenue, mainly from taxes, and its spending, for the year ahead. A budget deficit is when spending is greater than revenue, so the government must borrow. A budget surplus is when revenue is greater than spending. A balanced budget is when the two are equal.

Why governments spend

To provide public goods, such as defence and street lighting, and merit goods, such as schools and hospitals. To build infrastructure: roads, ports and power, which help firms produce more. To make transfer payments, such as pensions and cash support to poor families, and to influence total demand in the economy.

What a change in spending does

More government spending raises total demand: firms receive orders, produce more, and hire more workers. A cut in government spending reduces total demand, so output and employment may fall. That was the key link in one eight-mark question. But the effect depends on what is cut, how big the cut is, and whether the private sector spends more instead.

Why governments tax

To raise revenue, to pay for spending. To discourage demerit goods, such as cigarettes, by raising their price. To redistribute income, by taxing the rich at higher rates. To protect home industries, with tariffs on imports. And to manage total demand: higher taxes reduce spending, lower taxes raise it.

Direct and indirect taxes

A direct tax is a tax on income or wealth, paid straight to the government by the person or firm earning it: income tax and corporation tax on profits. An indirect tax is a tax on spending, collected by the seller: sales tax, excise duties on cigarettes, and tariffs. An indirect tax raises the price of the product, so it can discourage consumption.

Progressive, regressive, proportional

Here is a progressive tax. A person earning 1,000 dollars pays 100, which is 10 per cent. A person earning 10,000 pays 2,000, which is 20 per cent. The rich pay a higher share. A regressive tax takes a higher share from the poor; a proportional tax takes the same share from everyone.

Qualities of a good tax

Equitable: based on ability to pay. Certain: people know how much to pay, and when. Convenient: easy to pay. Economical: it should raise much more than it costs to collect. Efficient: it should improve how markets work, for example by reducing market failure, not harm incentives to work.

Mistakes that lose marks

Mistake one: listing the aims without explaining how two of them conflict. Mistake two: calling a sales tax a direct tax. Mistake three: saying a budget deficit is the same as a current account deficit. One is the government, the other trade. The fix: name the aim or tax precisely, then give the chain of effects.

The full-marks tip

The full-marks tip: explain a conflict as a chain: one aim is achieved, and that causes the other to move the wrong way. For a tax question, say direct or indirect, and who it affects most.

On one card

So, on one card: macroeconomic aims and the budget. Keep it for revision.