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P. 41. Direction of the Economic and Public Finance. p625.

The major objectives of Gov. policy:

1.       The control of unemployment. (-1970 low,-1986 high -1990 low, then rising)

2.       The control of inflation.(1991 was 5%)main objective of conservatives

3.       A favourable balance of payments. (UK was in deficit, north-sea oil helped)

4.       Economic growth(1985-1990 higher that Japan, prime objective is steady growth, greens argue against).

5.       Aid to less developed countries (suggested 0.7%, UK gave 0.3%, Netherlands 1%)

6.       Correcting market failure. (Public goods, Merit goods, externalises, cost-benefit analysis.

There is a conflict between these objectives (unemployment and inflation).

Policy options:

1.    Fiscal policy

Mainly Taxation And Gov. Spending(Central and local or capital and current expenditure). Must exist, because Gov. spends 40% of GNP.

Direct tax: Levied on the income, paid directly to Gov., most important.

Corporations' tax, capital gains tax (selling assets), national insurance contributions, inheritance t.(dies)

Fiscal drag - as inflation increases wage, personal allowings get relatively smaller and more tax has to be paid. Now an Act to eliminate that.

Indirect tax - taxes on expenditure. VAT + specific tax (£1 per item) + excise duty (on petrol).

If demand is inelastic gov. gets more tax. The extent by which the tax is passed on to consumer will be determined by the elasticities of demand & supply. The more inel. dem. more consumer pays.

Public sector borrowing requirement(PSBR).

-Links direct and indirect tax. That is the difference between public expenditure and income, 1987‑1991 was negative. PSBR creates inflation. Can be reduced by rising taxes&cutting expenditure.

1.       Keynesians view

Paid little attention to the monetary aspects and thought PSBR to give the economy a boost.

2.       Monetarists view

Think that PSBR increases money supply and inflation.

The national debt.

High National debt is not a problem, but interest is, because money is spent on economy (inflation). Wealthiest people usually receive interest.

a.       Interest payments - have remained constant % of GDP, because interest rates rose.

b.      Overseas payment- represents a real burden

c.       Crowding-out.PSBR might rise interest rates and thus decrease private investment(monetarists)

Poverty trap- marginal rate of taxation is almost 100%

Purpose of taxation:

        to raise money for Gov..

        to redistribute income and wealth

        to change patterns of consumption

A Smith's laws of taxation:

a.       element of certainty - people should know how much the tax is in advance

b.      must be convenient - easy to pay

c.       must be cheap to collect

d.      must be fair - people in similar situations pay equally

e.       should be flexible and not decrease output

2.    Monetary policies (p.35)

Interest rates + supply of money.

Became important in 1970 because of the inflation.

It concentrated to money supply at the beginning, leaving interest rates free. Nowadays vice-versa. Expanding supply of money and lowering interest rate should expand the economy.

3.    Direct intervention - not widely used. prices and incomes' policy to restrain inflation. For cost push inflation.

1.     Statutory - govn freezes wages and prices
2.     Voluntary - through argument and persuasion with unions

Problems: 1.    Confrontation - with trade unions e.g.

2.     Discrimination - more effective in the public sector
3.     Distortion of market forces - expanding sectors can't find new workers
4.     Differentials - when flat base policy is used
5.     Wages drift - earning rise faster than wages (bonuses like shorter working time actual-negot.W)

6.       But: Reduces differentials between people in general.

First in 1945. Was successful till 1950, but collapsed in inflation. Governments promised not to use, but finally had to. In 1980-ies long-term strategy was worked out.

Effectiveness: successful in short-term, store up trouble in the future.

Alternative taxes:

1.       Negative income tax(constant marginal tax revenue, no poverty trap, poor will be paid the tax)

2.       Wealth tax(only to rich, 1/2%)

3.       Reform of Nat. Insurance- weekly basis out of income, combine with income tax, privatisise.

Local authorities

EUUK Parliament Cambridge C.C. Cambridge, Eat-Cambridge, Fenland


1.       Most on education

2.       Social services (police)

3.       Transport(other than major roads)

4.       Leisure

5.       Refuse collection

Comes from:

1.       Government mostly

2.       Rates - based on a guess at what property would receive if let for a year.

                        nothing to do with how many people in the house

                        nothing to do with how much they use local services

                        nothing to do with the amount of income and no. of people working

                        criticism from the business, who didn't have a vote

3.       Poll tax - based on no. of adults in the house

                        People living in bigger houses were better off and vice-versa.

                        Extremely expensive to collect.

                        Very unpopular and many refusals to pay.

4.       The poll tax was changed to council tax, because was expensive to collect and regressive. Firms stayed paying the business rates.

                        based on market value of property

                        people living on their own get reduction

                        does NOT relate to the amount of social services used

5.       Service income

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