AS MacroFiscal Policy – 2 example questions

Context – the size of the deficit

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“If we don't get a grip on government spending, there will be no growth.”

George Osborne, 2011

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“If we don't get a grip on government spending, there will be no growth.”

George Osborne, 2011

“The danger of having no growth, or little growth, for a long time is high; you get a number of vicious cycles which come into play…You're playing with fire when you get to low growth rates”

Government spending and taxation

Discuss the effectiveness of cuts in government spending as a means of meeting the

government’s macroeconomic objectives

• Scrapping investment projects – job losses, impact on potential GDP, negative multiplier effects

Argument 1: Depends on where cuts are made

• Will other components of AD help to compensate? E.g. Exports? Consumer spending?

Argument 2: Depends on how deep cuts are

• Euro economy is in crisis? • Government has already lost AAA credit rating despite cuts

in government spending

Argument 3: Depends on external economic events

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Discuss the effectiveness of cuts in government spending as a means of meeting the

government’s macroeconomic objectives

• Scrapping investment projects – job losses, impact on potential GDP, negative multiplier effects

Argument 1: Depends on where cuts are made

• Will other components of AD help to compensate? E.g. Exports? Consumer spending?

Argument 2: Depends on how deep cuts are

• Euro economy is in crisis? • Government has already lost AAA credit rating despite cuts

in government spending

Argument 3: Depends on external economic events

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Discuss the effectiveness of cuts in government spending as a means of meeting the

government’s macroeconomic objectives

• Scrapping investment projects – job losses, impact on potential GDP, negative multiplier effects

Argument 1: Depends on where cuts are made

• Will other components of AD help to compensate? E.g. Exports? Consumer spending?

Argument 2: Depends on how deep cuts are

• Euro economy is in crisis? • Government has already lost AAA credit rating despite cuts

in government spending

Argument 3: Depends on external economic events

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To what extent would tax reductions help to bring about stronger growth in the UK economy?

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To what extentRequires good evaluationLots of uncertainty at the moment

Evaluate the point you are making in each paragraph!

To what extent would tax reductions help to bring about stronger growth in the UK economy?

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To what extentRequires good evaluationLots of uncertainty at the moment

Tax reductions1/ Which taxes might be cut?2/ Consumer or business taxes?

Evaluate the point you are making in each paragraph!

To what extent would tax reductions help to bring about stronger growth in the UK economy?

2:18:10 PM

To what extentRequires good evaluationLots of uncertainty at the moment

Tax reductions1/ Which taxes might be cut?2/ Consumer or business taxes?

Stronger growth1/ Context – weak recovery2/ Short term growth?3/ Long term growth? Evaluate the point

you are making in each paragraph!

To what extent would tax reductions help to bring about stronger growth in the UK economy?

2:18:10 PM

To what extentRequires good evaluationLots of uncertainty at the moment

Tax reductions1/ Which taxes might be cut?2/ Consumer or business taxes?

Stronger growth1/ Context – weak recovery2/ Short term growth?3/ Long term growth?

Different tax cuts for short and long term growth aims?

Evaluate the point you are making in each paragraph!

To what extent would tax reductions help to bring about stronger growth in the UK economy?

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Consumer spending• Cuts in VAT or income tax to boost demand

Business investment• Lower corporation tax to increase investment

Lower employment taxes• Reduced national insurance taxes

Reductions in fuel / carbon taxes• Lower costs for businesses, less inflation

To what extent would tax reductions help to bring about stronger growth in the UK economy?

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Low confidence – tax cuts likely to be saved

Consumer spending• Cuts in VAT or income tax to boost demand

Business investment• Lower corporation tax to increase investment

Lower employment taxes• Reduced national insurance taxes

Reductions in fuel / carbon taxes• Lower costs for businesses, less inflation

Direct tax cuts and ADGeneral

Price Level

Real National Output (Y)

SRAS1

AD1

Y1 Y2

P1P2

Will tax cuts boost demand?

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AD2

To what extent would tax reductions help to bring about stronger growth in the UK economy?

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Low confidence – tax cuts likely to be saved

Businesses might invest overseas instead

Consumer spending• Cuts in VAT or income tax to boost demand

Business investment• Lower corporation tax to increase investment

Lower employment taxes• Reduced national insurance taxes

Reductions in fuel / carbon taxes• Lower costs for businesses, less inflation

To what extent would tax reductions help to bring about stronger growth in the UK economy?

2:18:10 PM

Low confidence – tax cuts likely to be saved

Businesses might invest overseas instead

Skills shortages limit employment creation

Consumer spending• Cuts in VAT or income tax to boost demand

Business investment• Lower corporation tax to increase investment

Lower employment taxes• Reduced national insurance taxes

Reductions in fuel / carbon taxes• Lower costs for businesses, less inflation

To what extent would tax reductions help to bring about stronger growth in the UK economy?

2:18:10 PM

Low confidence – tax cuts likely to be saved

Businesses might invest overseas instead

Skills shortages limit employment creation

Consumer spending• Cuts in VAT or income tax to boost demand

Business investment• Lower corporation tax to increase investment

Lower employment taxes• Reduced national insurance taxes

Reductions in fuel / carbon taxes• Lower costs for businesses, less inflation

Conflicts with environmental policies

Lower taxes for businessesGeneral

Price Level

Real National Output (Y)

SRAS1

AD1

Y1 Y2

P1

P2

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SRAS2

Can tax changes drive LRAS higher?General

Price Level

Real National Output (Y)

SRAS1

Y1 Y2

P1

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LRAS1 LRAS2

AD1

AD2

Y3

Good evaluation approaches

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Evaluate the point you are making in each paragraph!

Tax cuts on their own are insufficient in the current UK economic context

Which tax cuts will boost short term growth?

Which tax changes might help long term competitiveness?

Consequences for other macro objectives?

Good evaluation approaches

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Evaluate the point you are making in each paragraph!

Tax cuts on their own are insufficient in the current UK economic context

Which tax cuts will boost short term growth?

Which tax changes might help long term competitiveness?

Consequences for other macro objectives?

Good evaluation approaches

2:18:10 PM

Evaluate the point you are making in each paragraph!

Tax cuts on their own are insufficient in the current UK economic context

Which tax cuts will boost short term growth?

Which tax changes might help long term competitiveness?

Consequences for other macro objectives?

Good evaluation approaches

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Evaluate the point you are making in each paragraph!

Tax cuts on their own are insufficient in the current UK economic context

Which tax cuts will boost short term growth?

Which tax changes might help long term competitiveness?

Consequences for other macro objectives?

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Remember to include a short reasoned conclusion at the end to boost evaluation marks

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Remember to include a short reasoned conclusion at the end to boost evaluation marks

“On balance I feel the strongest argument is for targeted tax cuts for businesses to boost jobs in the short term and investment in the long run.”

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