Understanding Fiscal Policy in GCSE Economics

What is Fiscal Policy?

Fiscal policy refers to the government's policies relating to public revenue (through taxation) and expenditure. It is a crucial tool used by governments to influence a nation's economic performance.

Government Revenue

The main source of government revenue is taxation. Some key taxes include:

• Income tax: A percentage of individuals' earnings
• Corporate tax: A levy on companies' profits
• Value Added Tax (VAT): A consumption tax on goods/services

Government Expenditure

Governments spend money on various areas such as:

• Public services: Education, healthcare, defense, welfare
• Public sector wages: Salaries for civil servants, teachers, etc.
• Infrastructure: Building roads, railways, public facilities

Budget Surplus/Deficit

A budget surplus occurs when government revenue exceeds expenditure, while a deficit is when expenditure exceeds revenue. Governments use fiscal policy to manage budget balances.

Impact of Fiscal Policy

Fiscal policy impacts key economic indicators like:

• Economic growth: Government spending can stimulate aggregate demand
• Employment: Public projects create jobs directly/indirectly
• Inflation: Higher taxes reduce disposable income, limiting demand-pull inflation

Worked Example

Scenario: An economy is in recession with high unemployment.

Fiscal Policy Response: The government could increase spending on public works and infrastructure projects while lowering taxes. This would boost aggregate demand, stimulating economic growth and creating jobs.

Understanding fiscal policy is crucial in GCSE Economics as it directly impacts a nation's economic performance, employment levels, and living standards.