Before you read. Discuss these questions with your partner.
- What taxes do people pay in your country?
- Are the taxes fair? Why / Why not?
Vocabulary. Choose the correct answer A, В or С from the list opposite.
1. The ______________ department of the government looks after roads, railways and airports,
2. The government hopes its ______________ will help reduce unemployment.
3. The parts that something is made of are sometimes called___________
4. ______________employment is when everyone who can work has a job.
5. The money that you have after you've paid taxes is called your ____________ income.
6. The part of a person’s salary that is not taxed is called their personal ____________
7. The government plans many new ____________ projects, such as building new hospitals and schools.
8. Another word for extra goods that are not needed is ______________.
9. When the economy is working at full ___________ it is using all its resources for production.
10. A ___________ is a large, fast road which connects cities.
11. A ___________ is a plan for achieving something.
12. In a __________ tax system, people who earn more pay more tax than people who earn less.
| 1. | a. transport | b. education | c. defence |
| 2. | a. components | b. allowance | c. policy |
| 3. | a. income | b. components | c. capacity |
| 4. | a. absolute | b. complete | c. full |
| 5. | a. full | b. disposable | c. spending |
| 6. | a. allowance | b. surplus | c. capacity |
| 7. | a. personal | b. public | c. disposable |
| 8. | a. surplus | b. shortage | c. allowance |
| 9. | a. employment | b. income» | c. capacity |
| 10. | a. path | b. motorway | c. railway |
| 11. | a. component | b. project | c. scheme |
| 12. | a. surplus | b. progressive | c. public |
Fiscal policy
Fiscal policy is one of the tools that governments have to keep the economy on a steady path. The two main components of fiscal policy are changes to the tax system and changes in government spending. But what changes can governments make in these two areas, and how do changes affect the growth of the economy.
Let’s look first at the tax system, and in particular at income tax. Income tax is one of the biggest sources of income for a government. Many governments operate a system called progressive taxation. This means that the more you earn, the more tax you pay. People are usually allowed to keep some of their income without paying any tax. This is called the personal allowance. The rest of their income is then taxed using the progressive system. For example:
| Income before tax | personal allowance | Tax to pay after allowance |
| £0 – £1,999 £2,000 – £29,999 £30,000 and over | £5,000 | 10% 22% 40% |
Governments can decide to change the size of the personal allowance, or change the percentage that each income group has to pay. It the economy is growing too fast, and demand for goods and services is more than the economy can supply, the government will want to slow down spending.
To do this, they can decrease the personal allowance, or they can increase the percentage to pay in tax. This will mean people have less disposable income, and spending will slow down.
It the economy is slowing down too much, governments can do the opposite.
What about government spending? How does that affect economic growth? The key to this is something called the multiplier effect. To understand how this works, let's look at an example. Imagine that the economy is not growing. This will make aggregate demand fall. In turn, productivity falls. This situation means that the nation’s resources are not all being used. In other words, there are surplus raw materials, machines are not being used and workers are unemployed. What the economy needs is а pull in demand for goods and services.
The government can provide this pull by spending a large amount of money on public projects. For example, imagine that the transport department decides to spend £200 million on building a new motorway. This will give work to building companies and jobs to unemployed workers. In other words, more resources are being used and the nation’s productivity is increased.
Companies and workers on the motorway project will save some of the money they earn, but also spend some. The money they spend will be income for others in the economy. If half of the £200 million is spent, then the total national income has grown by this much:
£200 million + (0.5 x £200 million)
Each time a proportion of the income is passed on, the economy grows again:
£200 million + (0.5 x £200 million) + (0.5 x 100 million), etc
In theory, the multiplier effect will continue until there is full employment and the nation’s resources are being used to their fullest extent.
