13. Fiscal & Supply-side Policies (AQA A Level Economics)

In 2017, the UK’s annual budget deficit was 2.3% of GDP, the lowest level since 2001. In 2017, the UK’s deficit on the current account of the balance of payments fell to 3.3% of GDP, the lowest level since 2011.

Explain the possible causes of a falling budget deficit.

All other things being equal, which one of the following is most likely to increase the national debt?

Which one of the following is correct for a proportional tax on income?

Extract D


Using the data in Extract D (Figure 3), calculate, to the nearest pound, the amount of income tax payable for someone in Scotland earning £13 500.

Extract D



Explain how the data in Extract D (Figure 2) show that the UK’s public finances have been improving since 2010.

Extract F: Scottish income tax

In most of the UK, reducing the budget deficit has focused on austerity rather than tax rises. However, the Scottish Government has announced that from April 2018, Scotland will have different rates of income tax to the rest of the UK, with changes that will see higher earners pay more and lower earners pay less. There will be a new tax band of 21% for those earning more than £24 000. The higher rate of tax will be increased from 40% to 41% and the top rate from 45% to 46%. A starter rate of 19% will also be introduced. The move to a ‘five-band’ income tax system should mean that nobody earning less than £33 000 in Scotland will pay more tax than they do now.

Estimates show that 55% of Scottish taxpayers will pay less compared to the rest of the UK under the new system, with higher earners paying more. Someone in Scotland earning £150 000 will pay £1774 more than if they lived elsewhere in the UK, with someone earning £40 000 paying £140 more. The extra revenue raised will be used to give public sector workers a 3% pay rise for those earning less than £30 000, and a 2% rise for those earning more than that, and will help towards the cost of providing superfast broadband to all premises in Scotland by 2021.

Some business leaders have warned that Scotland cannot afford to be associated with higher taxation than the rest of the UK. The Finance Minister for Scotland, Derek Mackay, claimed the changes could raise an additional £164 million and were necessary to “mitigate UK budget cuts, protect our NHS and other public services, support our economy and tackle inequality in our society”. He said the tax reforms would make “Scotland's income tax system even fairer and more progressive”. He resisted a bigger increase in the top rate of tax for those earning more than £150 000, aware that high earners may find ways to avoid paying it.

Source: News reports, 2017

Extract F (line 1) states ‘In most of the UK, reducing the budget deficit has focused on austerity rather than tax rises.’ Using the data in the extracts and your knowledge of economics, evaluate the view that there is a strong case for significant increases in UK income tax rates.

The diagram below shows the aggregate demand (AD) curve, the short-run aggregate supply (SRAS) curve and the long-run aggregate supply (LRAS) curve for an economy. The economy’s initial equilibrium is at E₁.


The government wants to achieve economic growth without conflicting with its long-run objective of price stability. All other things being equal, which one of the following policy combinations is most likely to enable the economy to achieve a new long-run equilibrium at E₂?

The table below shows different combinations of changes in the rate of interest and the government’s budget position. The economy has a negative output gap. All other things being equal, which one of the combinations of policies, A, B, C or D, is most likely to reduce the economy’s negative output gap? 

The marginal propensity to consume (MPC) in an economy is 0.5. If the MPC increases by 20% the new value of its multiplier will be

Refer Insert

After considering Extract E, and the original evidence in Extracts A, B, C and D, would you recommend that the Government should increase its spending on housing? Justify your recommendation

In the 2016 Autumn statement, the UK Chancellor of the Exchequer, Philip Hammond, officially abandoned the government’s policy of trying to achieve a budget surplus by 2020. While some criticise the government for failing to achieve its fiscal target, others argue that the government should be doing more to help the supply side of the economy.

Explain how fiscal policy can be used to try to improve the supply side of an economy.

In the 2016 Autumn statement, the UK Chancellor of the Exchequer, Philip Hammond, officially abandoned the government’s policy of trying to achieve a budget surplus by 2020. While some criticise the government for failing to achieve its fiscal target, others argue that the government should be doing more to help the supply side of the economy.

Evaluate whether achieving a budget surplus is a desirable objective of economic policy.

At the start of the financial year, an economy’s national debt stands at £1000 billion. Over the course of the year, the government plans to spend an extra £100 billion and borrow an extra £40 billion.

If the government achieves its spending and borrowing targets, by the end of the financial year the national debt will have increased by

All other things being equal, an increase in the ratio of capital to labour resulting from an increase in investment is most likely to lead to a

Which one of the following is most likely to cause an increase in the structural budget deficit?

Extract E: Good and bad deflation

Deflation is bad when it is the result of falling aggregate demand. Consumers buy fewer goods and services and firms cut prices whilst consumption and investment decisions are delayed. This can lead to worsening company profits, cost cutting and job losses. Less spending damages economic growth and could lead to a deflationary spiral. However, this has not been the UK’s recent experience. A glut in the supply of oil has driven down its price. This has had a positive effect on most businesses who face lower costs. In the retail sector, in particular, prices are lower because goods are cheaper to manufacture and transport. Businesses can also spend more on investment, hiring staff or offering pay rises. This has led to pay growth and productivity gains in the private sector after years of stagnation. Improvements in productivity on the supply side of the economy could actually lead to more deflation but this could be viewed as good deflation.

Professor Steve Keen believes even mild deflation is bad news. If the government continues with its programme of austerity, he is convinced the UK is heading for bad deflation. “Deflation is only benign, or even beneficial, in a world in which no one has any debt. Bizarrely, this is the world that conventional economists actually imagine we live in, since their models have ignored debt. Deflation increases the burden of people’s debt, which is what happened in the 1930s, during the Great Depression.”

The most immediate implication of continued deflation is that it makes a rise in interest rates less likely and, in the short term, this is good news for borrowers, but not for savers. This should also allow more time for the economy to recover, with low interest rates helping consumers and firms to access cheaper credit.

Source: News reports, 2016

Extract E (lines 9–10) states ‘Improvements in productivity on the supply side of the economy could actually lead to more deflation.’

With the help of a diagram, explain how improvements in productivity could cause deflation.

Between 2011 and 2016, UK unemployment fell from a high of 8.5% to 4.8%. Some argue that government attempts to reduce unemployment inevitably lead to trade-offs with other macroeconomic policy objectives.

Explain how government policies can reduce the natural rate of unemployment.

The Government has ruled out the possibility of a rise in VAT before 2020 but other indirect taxes may increase. It has also stated that the personal income tax allowance will be increased from £10 800 in 2015/16 to £12 500 by 2020, and plans to cut the main rate of corporation tax from 20% to 17%.

Explain how changes in both government spending and taxation might affect the level of economic activity.

The Government has ruled out the possibility of a rise in VAT before 2020 but other indirect taxes may increase. It has also stated that the personal income tax allowance will be increased from £10 800 in 2015/16 to £12 500 by 2020, and plans to cut the main rate of corporation tax from 20% to 17%.

Evaluate the economic consequences for the UK economy of a significant shift in the burden of taxation from direct taxes to indirect taxes.

The table below shows the marginal income tax rates in an economy for 2016.

Table: Marginal income tax rates for every $1 of income

How much income tax would be payable by someone earning $40 000 in 2016?

The national debt is the