Fiscal choices and budget balances
| English | 中文 | Pinyin |
|---|---|---|
| fiscal policy/ˈfɪskl ˈpɒlɪsi/ | 财政政策 | cái zhèng zhèng cè |
| budget deficit/ˈbʌdʒɪt ˈdefɪsɪt/ | 预算赤字 | yù suàn chì zì |
A decision you can investigate
- A government repairs schools and raises a sales tax.
- Spending and revenue decisions affect both public services and private spending power.
Build the explanation
- Fiscal policy 财政政策 uses government expenditure and taxation to influence the economy. Direct taxes apply directly to incomes or profits; indirect taxes apply to spending or transactions. Spending includes health, education, infrastructure, defence and benefits.
- A budget deficit 预算赤字 means expenditure exceeds revenue; a surplus means revenue exceeds expenditure. More spending or lower taxes can increase total demand; the outcome depends on spare capacity, imports and household/business responses.
Work through the evidence
- Fictional revenue is 90 billion and expenditure 100 billion: deficit = 10 billion. Cutting spending to 95 while revenue stays 90 reduces the deficit to 5; it does not create a surplus.
- A school-building programme creates demand for builders and materials and can reduce cyclical unemployment. If resources are already fully used, extra demand may raise prices. Imported materials create demand abroad too.
Revenue 90 and spending 95 create
Spending exceeds revenue by 5; total debt is not given.
Test the limits
- Borrowing finances a deficit but creates debt-servicing obligations. A surplus can reduce borrowing or debt, while tax rises or spending cuts can weaken demand and jobs.
- Distribution depends on which taxes and services change. A deficit is an annual flow; outstanding government debt is a stock. Do not equate every deficit with irresponsible policy.
Which is a direct tax?
Income tax applies directly to income.
The annual budget deficit and accumulated government debt are the same measure.
One is a flow during a period; the other is an outstanding stock.
Apply and explain your answer
- What additional information would help judge whether school construction raises output or mainly prices?
- Spare construction capacity, available workers/materials and how much spending goes on imports.
Why might expansionary fiscal policy raise inflation near capacity?
Limited productive capacity can turn extra demand into price pressure.
Use the terms precisely
- fiscal policy: Use of public spending and taxation to influence the economy.
- budget deficit: Public expenditure exceeds public revenue during a period.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
Fictional revenue is 90 billion and expenditure 100 billion: deficit = 10 billion. Cutting spending to 95 while revenue stays 90 reduces the deficit to 5; it does not create a surplus. A school-building programme creates demand for builders and materials and can reduce cyclical unemployment. If resources are already fully used, extra demand may raise prices. Imported materials create demand abroad too.
Borrowing finances a deficit but creates debt-servicing obligations. A surplus can reduce borrowing or debt, while tax rises or spending cuts can weaken demand and jobs. Distribution depends on which taxes and services change. A deficit is an annual flow; outstanding government debt is a stock. Do not equate every deficit with irresponsible policy.
Fiscal policy uses government expenditure and taxation to influence the economy. Direct taxes apply directly to incomes or profits; indirect taxes apply to spending or transactions. Spending includes health, education, infrastructure, defence and benefits.