T13 - Fiscal Policy and Supply-Side Policies

 Fiscal policy – the use by the government of government spending and taxation to
try to achieve the government’s policy objectives

How fiscal policy can be used to influence AD and AS

 Balanced budget – achieved when government spending equals government
revenue (G=T)
 Budget deficit – occurs when government spending exceeds government revenue
(G>T) this represents a net injection into the circular flow of income hence budget
deficit is expansionary
 Budget surplus – occurs when government spending is less than government
revenue (G<T) this represents a net withdrawal from the circular flow of income
hence a budget surplus is contractionary
 Demand-side fiscal policy – used to increase/ decrease AD – shift AD right/ left –
through changes in government spending, taxation and budget balance
 Deficit financing – deliberately running a budget deficit and then borrowing to
finance the deficit.
 reasons for use of fiscal policy – Keynesian view – before 1979:
 Unregulated market economy - unnecessarily low economic growth, high
unemployment and volatile business cycles.
 Lack AD – private sector save too much, invest too little - the economy settles into an
under-full employment equilibrium characterised by demand-deficient
unemployment.
 Deliberate deficit financing – government - inject demand and spending power into
the economy - eliminate deficient AD - achieve full employment.
 Achieving full employment - government use fiscal policy in discretionary way -
changing tax rates and levels of public spending to meet new circumstances - fine-
tune level of AD. Keynesian - believe fiscal policy - achieve full employment and
stabilise the economic cycle - while avoiding high inflation.
 Overall stance of fiscal policy and economic policy - orientated towards the demand-
side of the economy microeconomic elements of fiscal policy – e.g. transfers to
industry - aimed at improving economic performance on the supply side. But overall
- supply-side fiscal policy - treated as subordinate
to the macroeconomic management of AD - to assumption output - respond to
demand stimulation. Microeconomic elements of Keynesian fiscal policy - generally
interventionist rather than non-interventionist - extending rather than reducing the
state’s role in the mixed economy.
 Central to Keynesian fiscal policy - assumption the government spending multiplier
has a high value - If national income multiplier is quite large with respect to real
output —e.g. increase in government spending of £10 billion increases AD and
money national income by £30 billion - relatively large multiplier means changing
levels of government spending, taxation and the budget deficit/ surplus - quite
effective in managing AD - however, real-world government spending multipliers -
generally small.
 T13 - Fiscal Policy and Supply-Side Policies

Using AD/AS diagrams to illustrate demand-side fiscal policy:

 Expansionary fiscal policy – uses fiscal policy to increase AD and shift AD curve to
right
 Contractionary fiscal policy – uses fiscal policy to decrease AD and shift AD curve to
the left
 Government spending – a component of AD - increase in G or
cut in taxation - increases size of the budget deficit/ reduces
budget surplus - Injection into circular flow of income occurs -
effect on AD is expansionary.
 Diagram - effect of reflationary/ expansionary fiscal policy -
initially AD curve = AD1 - equilibrium national income = point X
- Real income/ output = y1, price level is P1.
 eliminate demand-deficient unemployment (cyclical) -
government increases budget deficit - raising level of
government spending and/or cutting taxes - expansionary fiscal policy shifts AD
curve right - AD1 to AD2 - economy moves to new equilibrium - point Z.
 evaluation - However, extent to which expansionary fiscal policy expands level of
real output/ creates excess demand - leads to demand-pull inflation - depends
on shape of the SRAS curve - depends on how close economy was to normal capacity
level of output – (Y3) - nearer the economy gets to normal capacity level of output –
LRAS - greater the inflationary effect of expansionary fiscal policy - smaller the
reflationary effect.
 Once normal capacity level of output is reached - further increase in government
spending/ tax cut solely - inflates the price level - real output cannot - no spare
capacity - economy is producing on its PPF
 Diagram can be adapted - illustrate effect of a deflationary/ contractionary fiscal
policy - a cut in government spending and/ or an increase in taxation - shifts AD
curve to left – evaluation - extent to which the demand deflation results in the price
level/ real income falling again depends on shape and slope of the SRAS curve.
 Discretionary fiscal policy – involves making discrete changes to G, T and budget
deficit to manage the level of AD
 Crowding out – a situation in which an increase in government/ public-sector
spending displaces private-sector spending, with little or no increase in AD
Fiscal policy and AS:
 Supply-side fiscal policy – used to increase the economy’s ability to produce and
supply goods, through creating incentives to work, save, invest, and be
entrepreneurial. Interventionist supply-side fiscal policies, such as the financing of
retraining schemes for unemployed workers, are also designed to improve supply-
side performance
 Supply-side policies – government economic policies which aim to make markets
more competitive and efficient, increase production potential and shift LRAS to right.
Supply-side fiscal policy is arguably most important type of supply-side policy.
 demand-side fiscal policy - income tax cuts stimulate AD - through shifting AD curve
to the right. In supply-side fiscal policy - income tax cuts increase AS - via effects on
economic incentives - Supply-side fiscal policy – aim to increase economy’s ability to
produce and supply goods - creating incentives to work, save, invest and be
 T13 - Fiscal Policy and Supply-Side Policies

entrepreneurial - other important elements to supply-side fiscal policy - include such

interventionist policies as government spending on retraining schemes.
Using AD/AS diagram to illustrate supply-side fiscal policy:
 Supply-side fiscal policy - used to shift the economy’s LRAS
curve to right - increasing the economy’s potential level of
output - effect of successful supply-side fiscal policy on the
LRAS curve – shown in diagram.
 Economy’s LRAS curve shifts right - LRAS1 to LRAS2 - the normal
capacity level of output increased - due to long-run economic
growth - yN1 to yN2 - diagram also shows a right shift of SRAS
curve - reflecting improvement in productivity and falling unit
costs.
 Develop diagram - depicting resulting fall in the price level - show a good deflation -
price level falls - benign effects of successful supply-side policies and supply- side
reform in economy’s private sector – evaluation – however, improvements in the
supply-side performance of the economy - accompanied by rising AD - means the
effect is to moderate inflation rather than lead to deflation.

Public expenditure and taxation:

How government spending and taxation can affect the pattern of economic activity:
 Taxation - raises revenue required to finance government spending - taxes and
subsidies can be used to alter the relative prices of goods and services - change
consumption patterns and promote investment by firms in new capital goods.
 Synoptic link – T8 - governments collect tax revenue - finance provision of goods –
e.g. roads and schools - would be under-provided/ not provided at all.
Types of and reasons for public expenditure:
 Public expenditure - classified into various categories - important distinction -
investment in new capital projects and infrastructure and expenditure to meet
annual running costs from such projects – e.g. paying teachers’ salaries.
 significant part of government expenditure – transfers – e.g., state pension and
unemployment-related benefits - unlike spending on capital projects and subsequent
running costs - transfers don’t involve a claim by the government on national output
- instead spending by the government on transfers - redistributes income and
spending power - one part of the private sector to another —taxpayers to recipients
of state benefits and pensions.
 third type of public spending - interest payments on the national debt - rises when
interest rates rise and when government runs a budget deficit - financed by new
government borrowing - adds to the national debt.
Public spending on social protection, health and education:
 total managed expenditure – total amount the government spends. It splits into the
amount that government departments such as defence have been allocated to
spend and spending that is not controlled by the government department, including
welfare, pensions and national debt interest payments.
 Office for budget responsibility – advisory public body that provides independent
economic forecasts and analysis of the public finances as background to the
preparation of the UK budget.
 T13 - Fiscal Policy and Supply-Side Policies

 largest areas of public spending - on social protection - encompasses financial

assistance and services to those in need/ at risk of hardship - and on health and
education - In financial year 2019/20 - spending on social protection - expected to be
30.4% of central government total managed expenditure (TME) - with spending on
health and education standing respectively at 19.7% and 12.2% - three UK
government departments involved - Departments for Work and Pensions, Health and
Social Care, and Education.
 Spending on social security - increased after 2007 - 2008–09 recession - reduced
incomes and increased unemployment
 Pensioners - receive over half all social security spending - spending on elderly -
forecast to increase rapidly - increase driven by steady growth in number of
pensioners - and by triple lock - protects pensioners from effect of spending cuts
 triple lock - guarantees the state pension rises with whatever is highest out of wage
increases, CPI inflation, or 2.5% - If this continues - total public spending of social
security, the NHS and state education - likely to continue to rise – pensions triple
lock - pushing up government spending at a time when the population was ageing
rapidly.
 Health spending - also experienced significant growth over recent decades - 2002
onward - Labour governments increased spending on the NHS - 7% of national
income - still below the OECD average - other departments experienced budget cuts
- part of the government’s austerity programme - spending on NHS - effectively
frozen in real terms since 2010 - despite a commitment in 2018 - increase spending
on NHS by £20 billion - increased population, longer life spans, and cost of new drugs
and medical technology - NHS spending levels likely to lag behind demographics-
driven demand.
 education budget - grew substantially under Labour governments - 2002 onward -
spending on schools has been protected - other areas of education spending have
not - Higher education - largest cuts in public spending - offset by increase in fees
paid by students.
 Reason for changes in government spending and taxation - changes taking place in
employment and unemployment - relate to the economic cycle - spending on social
security - which includes unemployment-related benefits - by far largest single
category of public spending - when economy booms - unemployment falls - spending
on social security falls – as a result - cyclical component of budget deficit becomes
smaller - reverse is true in a recession
Demand-led spending:
 pattern of public spending and extent to which certain types of public spending
increase - depends on extent to which spending is demand-led - Demand-led
spending — e.g., unemployment benefits — is led by demand - increasing when
unemployment grows and falling when unemployment drops - although rates at
which unemployment benefits and pensions are paid, and the ages
at which people qualify, can be changed - demand-led spending changes according
to the phases of the economic cycle - in the case of spending on the state pension -
according to how long elderly people live.
Transfer payments made by the government:
 large part of government expenditure - transfer payments - e.g. state pension and
unemployment-related benefits - transfer payments are a redistribution of spending
 T13 - Fiscal Policy and Supply-Side Policies

power from taxpayers in general to those receiving welfare benefits - by contrast -

government spending on new hospitals/ schools directly increases national output -
as a generalisation - income taxes and transfers reduce disposable incomes of those
in work - increase the disposable incomes and spending power of those living on
welfare benefits - who are very often out of work.
 Transfers - major part of the social protection - at £252 billion in 2019/20 dwarfed all
other types of public spending - when transfers are excluded - government spending
falls as a proportion of GDP – more accurate measure of the share of national output
directly commanded by the state - to produce the hospitals, roads and other goods
and services which government collectively provides and finances - out of taxation.
Debt interest:
 Debt interest - made up of payments by government to people who lent to the state
- 2019/20 - interest payments on national debt - expected to be £41 billion - 5% of
public spending - rises when interest rates rise and falls when interest rates are cut -
is a transfer from taxpayers in general to people who lend their savings to the
government - total interest payments - affected by general level of interest rates -
heavily influenced by the level of Bank Rate set by monetary policy - in terms of fiscal
policy - if national debt can be reduced - debt interest as a fraction of nominal GDP
also falls — providing interest rates don’t rise – conversely - if national debt rises
faster than nominal GDP - debt interest rises as a fraction of real GDP — providing
interest rates don’t fall.
How taxation affects the pattern of economic activity:
 total amount of revenue from different taxes in 2019/20 - three main categories of
tax – income tax, taxes on spending or expenditure, and taxes on capital - taxes on
income include personal income tax and national insurance contributions and
corporation tax - National insurance - are a second type of personal income tax - may
eventually be merged into personal income tax. Corporation tax is a tax paid by
companies on their profits.
 two main indirect taxes - VAT and excise duties on goods such as motor fuels, alcohol
drinks and tobacco - 2019/20 expected to raise £156 billion and £50 billion in tax
revenues.
 Taxes on wealth and capital - not very important in the UK - council tax - tax on
property, and business rates - the only wealth taxes - Inheritance tax - tax on wealth
given from the dead to the living - is included under ‘Other taxes’ - much of income
tax revenue - paid when people work for a living - wealth taxes - stem from
ownership of assets such as houses and stocks and shares - reflect accumulation,
build- up of personal, household and business wealth in the economy.
Types of and reasons for taxation:
 tax - compulsory levy made by government - pay for its activities - taxes used to
finance the different types of public expenditure principal source of government
revenue for most economies - UK about 95.2% of total taxation - levied by local
government - council tax (local government) - accounting for the remaining 4.8% -
2019/20 - all but £54 billion of total expected revenue of £810 billion - expected to
come from taxation - non-tax income - expected to come from other sources – e.g.
interest and dividends which government receives.
 2018/19 - UK government raised £49 billion from excise duties - long-term revenue
received by the Treasury from these duties is in decline - In future – government is
 T13 - Fiscal Policy and Supply-Side Policies

going to have to find new sources of taxation to finance public expenditure – moving
away from combustion engine and fossil fuels
 governments tax - achieve economic goals - such as altering distributions of income
and wealth and the management of AD.
Direct and indirect tax:
 direct tax – a tax that cannot be shifted by the person legally liable to pat the tax
onto someone else. Direct taxes are levied on income and wealth
 indirect tax – a tax that can be shifted by the person legally liable to pay the tax onto
someone else e.g. through raising prices of a good sold. Indirect taxes are levied on
spending.
Progressive, regressive and proportion taxation:
 Progressive taxation - reduce inequalities in the distribution of income - progressive
- when the proportion of income paid in tax rises as income increases - combined
with transfers to lower-income groups - reduces spending
power of the rich - increasing that of the poor - some taxes
designed to reduce consumption of the demerit goods
alcohol and tobacco - regressive - fall more heavily on the
poor
 Regressive taxation – when the proportion of income paid
in tax falls as income increases
 Cigarette duty - example of regressive taxation - the low-
paid lose a greater proportion of income in tax than rich
when buying cigarettes and alcohol - VAT is another
example of a regressive tax – additionally - rich recognise
health hazards of tobacco consumption - better educated.
 Proportional taxation – when the proportion of income paid in tax stays the same as
income increases
 free-market economist - advocated introduction of proportional taxation -
sometimes called a flat tax - proportional income tax system - introduced in
countries within central and eastern - equity of a system that allows millionaires to
pay the same rate of income tax as ordinary workers is questionable - result in
governments facing significant budget deficits - long term - public expenditure
needed to shrink.
Relating progressive, regressive and proportional tax to marginal and average tax rates:
 taxes such as income/ inheritance tax - identify whether is progressive, regressive or
proportional – examine relationship between average rate at which the tax is levied
and the marginal rate - progressive tax system - marginal tax rate is higher than
average tax rate - average rate (measures the proportion of income paid in tax) -
rises as income increases - regressive tax system - marginal rate of tax is less than
the average rate - two are equal in case of a proportionate tax.
tax paid
 income tax - average tax rate=
income
tax paid
 marginal tax rate=
income
 average tax rate - indicates the overall burden of the tax on the taxpayer - marginal
rate may significantly affect economic choices and decision making – in the case of
 T13 - Fiscal Policy and Supply-Side Policies

income tax - marginal tax rate influences choice between work and leisure - also
influences decisions on whether to spend income on consumption/ save.
The principle of taxation:
 Principle of taxation – a criterion used for judging whether a tax is good or bad.
 Taxpayers - view all taxes as bad - they do not enjoy paying them - most realise
taxation is necessary - provide public goods - evaluating whether tax is good/ bad -
Adam Smith’s four principles of taxation - equitable, economical, convenient and
certain - may add the principles of efficiency and flexibility - good tax meets as many
of these principles as possible - conflicts and trade-offs - usually impossible for a tax
to meet them all at the same time – bad tax meets few if any of the guiding
principles of taxation.
 Economy - tax should be cheap to collect in relation to the revenue it yields.
 Convenience and certainty - tax should be convenient for taxpayers to pay and
taxpayers should be reasonably sure of amount of tax they will be required to pay.
 Equity - tax system should be fair - may be different/ conflicting interpretations of
what is fair – particular tax should be based on the taxpayer’s ability to pay - this
principle is one of the justifications of progressive taxation - rich have a greater
ability to pay than the poor.
 Efficiency - tax should achieve its desired objective(s) - minimum undesired side-
effects/ unintended consequences - disincentive effect on effort - an unintended
consequence of high rates of income tax.
 principle of flexibility - tax must be easy to change to meet new circumstances.
Role and merits of different UK taxes:
 large proportion of people’s income goes to paying taxes - tax accounts for a third of
the money people earn - direct taxes account for 20% - rest goes mainly on VAT,
duty on alcohol and petrol, council tax and other indirect taxes.
 Taxation - principal source of government revenue - In UK about 91.1% of total
taxation is levied by central government - local government taxation accounting for
the remaining 8.9% - 2018/19 - all but £51 billion of total expected revenue of £769
billion - expected to come from taxation.
 Taxes on income - direct tax – person/ organisation being paid the income is directly
liable to pay the tax to the government - Failure to declare income is tax evasion.
 income tax - cheap to collect - convenient and certain for taxpayer - and equitable -
reflects taxpayers’ ability to pay - basic tax threshold set at high level - people with
low incomes - taken out of the tax net zero income tax - most wage and salary
earners - income tax collected by the government through PAYE - income tax cheap
to collect.
 income tax - relatively easy to avoid and evade - strictly for cash - relatively low
incomes may successfully evade tax – high income earners - easy to avoid tax legally
- not illegal - allow some taxpayers to exploit unintended loopholes in tax system.
 Avoiding/ evading paying tax - disadvantages of income tax - highly progressive
income tax - lead to undesirable unintended consequences — e.g., disincentivising of
hard work, risk taking and entrepreneurial effort.
 personal income tax - main source of government tax revenue - reflects fact that for
personal income tax - tax base is wide - millions receive income that can be taxed -
total government revenue from the taxation of income – much higher than revenue
collected from personal income tax - companies pay corporation tax on income/
 T13 - Fiscal Policy and Supply-Side Policies

profits - most employees pay national insurance contributions as well as personal

income tax to the government.
 Taxes on capital and wealth - direct taxes - taxes on capital and wealth can be
avoided and evaded - wealth in form of cash can be money laundered - given from
one person to another - on the other hand - wealth in the form of property is less
easily hidden - successive British governments - little interest in updating property
values - last time houses were valued for purpose of collecting council tax - 1991
 Some general comments on the structure of UK taxation - financial crisis and 2008–
09 recession - government’s tax revenues collapse - budget deficit increase sharply -
tax receipts from capital taxes declined rapidly - taken over a decade to recover -
corporation tax revenues fell significantly during the recession - appear to be in long-
term decline - tax revenue from personal income - struggled to recover from the
crisis - increasingly dependent on higher income groups.
 Taxes on spending - now main source of government tax revenue - Before recession -
VAT was 17.5% - temporary measure - cut in November 2008 - 15% - stimulate
economy - since April 2012 has been 20% - property taxes - increased as a source of
government revenue - regressive taxes - increased since the recession.
Role and merits of taxes in affecting the distribution of income and wealth:
 governments use taxation and public spending - try reduce inequality between rich
and poor - more recently - combined effects of taxes and public spending - made
distribution of income much more equal than if governments did not intervene -
supply-side thinking - government policy affected by conflict between two of
principles of taxation - efficiency and equity.
 Efficiency - requires greater incentives for work and enterprise - increase UK’s
growth rate – However - progressive taxation and transfers to poor - income more
equitable - people have less incentive to work hard and take risks - ease with which
poor can claim welfare benefits and level at which they’re available - poor rationally
choose unemployment and state benefits over low wages and work – unwaged -
effectively ‘married to the state’ - some poor - antisocial behaviour - attacking public
and privately owned property.
the supply-side view:
 supply-side economists - argue income tax rates and benefit rates - should be
reduced - tax and benefit cuts - alter the work/leisure choice in favour of supplying
labour - particularly benefit claimants - lack skills necessary for high-paid jobs -
eventually everyone better off - necessary to increase the gap between amount
people earn when in work and what they receive when out of work - making the
poor because unemployed worse off.
 increased inequality - create incentives - facilitate economic growth - all will
eventually benefit - trickle- down effect - poor eventually end up better off in
absolute terms - but inequalities widened - still relatively worse off compared to rich
- inequality increased in 1980s - stabilised in late 1990s - intended outcome of
government supply-side fiscal policy.
 UK - one of the most unequal countries in Europe in terms of disposable income -
2014 – UK Gini coefficient - 36% - France and Germany’s 29% and Italy’s 32.5%.
 merits and demerits of different types of taxation - extent to which particular tax
satisfies principles of taxation
 T13 - Fiscal Policy and Supply-Side Policies

The budget deficit and national debt:

 national debt – the stock of all past government borrowing that has not been paid
back
relationship between budget balance and national debt:
 UK government - run budget deficit - flow of public-sector borrowing builds up a
stock of accumulated debt - central government’s accumulated debt is the national
debt - recently – deficit fell by a third - but national debt continued to grow
 debt to GDP ratio - an indicator of burden of the national debt on the economy -
while nominal national debt may be rising - national debt as a percentage of nominal
GDP may be falling - happens when nominal GDP rises faster than the nominal debt -
either economic growth (good)/ inflation (bad)/ both.
 budget deficit - generally increases total interest payments the government has to
pay - budget surplus - allows government to reduce national debt - paying back a
fraction of past borrowing - changes in interest rates - also affect the outcome.
Cyclical and structural budget deficit/ surplus:
 cyclical budget deficit – the part of the budget deficit which rises in the
downswing of the economic cycle and falls in the upswing of the cycle
 structural budget deficit – the part of the budget deficit which is not affected by
the economic cycle but results from structural change in the economy affecting
the government’s finances, and also from long-term government policy decisions
 cyclical budget deficit - related to level of AD in the different phases of the
economic cycle – boom phase - economy is above its potential - tax receipts -
relatively high - spending on unemployment benefit is low – cyclical deficit falls in
the boom - possibly moving into surplus - reverse happens in the downswing in
the economic cycle - tax revenues fall - public spending on unemployment and
poverty-related welfare benefits increases - Government borrowing increases -
cyclical deficit gets larger.
 structural budget deficit - not related to the state of the economy - does not
disappear when economy recovers - gives a better guide to underlying level of
the deficit than the headline/ cyclical figure - cannot be directly measured so it
has to be estimated - growth in the structural component of the budget deficit -
relates in part to the changing structure of the UK economy - also relates to
government policy decisions – e.g. those related to defence expenditure recently
- number of factors and trends - contributed to growth of the structural deficit -
deindustrialisation and globalisation eroding the tax base - movement of
industries to eastern Europe and Asia - through to ageing population and growth
of single-parent families - dependent on welfare benefits.
 growing structural deficit - dispiriting message that government – wants to
improve public sector finances – needs to introduce significant tax increases/
public spending cuts/ possibly both. - happened at time of rapid deterioration in
UK’s public finances from 2008 onward
consequences of budget deficit and surplus for macroeconomic performance:
Keynesian view:
 Keynesian-inspired governments - used discretionary macroeconomic policy -
manage the level of AD in the economy - using contractionary fiscal/ monetary policy
 T13 - Fiscal Policy and Supply-Side Policies

- deflate AD in the boom phase of the economic cycle - expansionary fiscal/

monetary policy – reflate AD - counter downswing of the cycle - If successful -
economic cycle would be smoother and less volatile - through better utilisation of
labour and other resources throughout the cycle - long-run trend rate of growth
might improve – known as counter-cyclical demand management policy.
Automatic stabilisers:
 Automatic stabilisers – fiscal policy instruments, such as progressive taxes and
income related welfare benefits, that automatically stimulate AD in an economic
downswing and depress AD in an upswing thereby smoothing the economic cycle.
 government bases fiscal policy on the operation of automatic stabilisers – dampen/
reduce multiplier effects resulting from change in AD within the economy - reducing
volatility of ups and downs in the economic cycle
 e.g. - collapse of confidence/ export orders -
causes AD to fall - national income begins to fall
- declining by initial fall in demand - as national
income falls and unemployment rises - demand-
led public spending on unemployment pay and
welfare benefits rises - If income tax system is
progressive – government tax revenues fall
faster than national income - increased public
spending on transfers and declining tax
revenues inject demand back into the economy
- stabilising and dampening the deflationary
impact of fall in AD - reducing overall size of the contractionary multiplier effect.
 Automatic stabilisers - also operate in opposite direction – dampen expansionary
effect of an increase in AD - incomes and employment rise - means-tested welfare
benefits and unemployment-related benefits falls - at same time tax revenues rise
faster than income - taking demand out of economy - reducing the size of the
expansionary multiplier - automatic stabilisers reduce overheating in the boom
phase of the economic cycle.
Developed economies and automatic stabilisers:
 automatic stabilisers – e.g. - progressive taxation and income-related transfers
contributed to milder economic cycles experienced by the UK - before 1939 -
economic cycles - much more volatile - greater fluctuations between boom and
slump - Keynesians - claimed the relatively mild economic cycles prior to 1973 -
evidence of success of Keynesian demand management policies in stabilising cyclical
fluctuations – However - economic cycle relatively mild both in the UK and countries
such as West Germany – didn’t use fiscal policy to manage AD - could suggest that
automatic stabilisers of progressive taxation - more significant than discretionary
fiscal policy – in reducing fluctuations in economic cycle.
 most economists now - agree a deficit should grow in the downswing of the
economic cycle - provided deficit is matched by surplus in the subsequent upswing -
Osborne cuts - created austerity Britain - one feature of which has been major cuts
to social care and services.