Level: SL and HL. Sections marked HL only are for Higher Level students.
Governments influence aggregate demand directly through their spending and taxation. Fiscal policy is powerful in a deep recession but limited by debt, politics and time lags.
3.6.1 Fiscal policy: revenue and expenditure
Definition
Fiscal policy is the use of government spending and taxation to influence aggregate demand and achieve macroeconomic objectives.
| Sources of government revenue | Types of government expenditure |
|---|
| Direct taxes: personal income tax, corporate tax, wealth taxes | Current expenditure: day-to-day spending on wages of public employees, medicines, school supplies |
| Indirect taxes: GST, VAT, excise duties | Capital expenditure: spending on long-lasting assets such as roads, railways, schools and hospitals |
| Sale of goods and services by state-owned enterprises: railway fares, electricity | Transfer payments: pensions, unemployment benefits, cash transfers (not payments for output, so not counted in G) |
| Sale of government assets: privatisation and disinvestment | |
Definition
A budget deficit occurs when government spending exceeds revenue; a budget surplus when revenue exceeds spending.
Example
A capital spending push. India's Union Budgets have sharply increased capital expenditure on highways, railways and ports in recent years, to around ₹11 lakh crore a year, to support demand in the short run and expand productive capacity in the long run.
🔒 Also in the full notes
- 3.6.2 Goals of fiscal policy
- 3.6.3 Expansionary and contractionary fiscal policy
- 3.6.4 The Keynesian multiplier (HL only)
- 3.6.5 Effectiveness of fiscal policy: constraints
- 3.6.6 Effectiveness of fiscal policy: strengths
- Exam practice: 5 questions with mark allocations
- 2 exemplar answers with full model answers and examiner commentary
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