101 Concepts for the Level I Exam
Concept 33: Fiscal Policy Tools
Fiscal policy tools include::
- Current expenditure: On-going spending on goods and services by government. For e.g. salaries of government personnel, national defense expenditure etc.
- Transfer payments: Primarily aimed at redistributing wealth. For e.g. unemployment insurance benefits, social security etc.
- Capital expenditure: Government spending on infrastructure projects to boost economic productivity. For e.g. bridges, road networks etc.
- Direct taxes: Taxes levied on wealth and income. Includes income taxes, corporate taxes, wealth taxes capital gains taxes etc.
- Indirect taxes: Taxes levied on goods and services. Includes sales taxes, value-added taxes, excise taxes etc.
Advantages and disadvantages of fiscal policy
- Indirect taxes can be implemented swiftly and start generating revenue for the government immediately without incurring additional costs.
- Indirect taxes like VAT can influence spending behavior instantly and can be used to discourage consumption of sin products like alcohol and tobacco.
- Implementation of changes in direct taxes and transfer payments policies is time consuming, thereby delaying the impact of the fiscal policy.
- Capital expenditure projects like road construction have long gestation periods; delaying the impact of the fiscal policy.