Fiscal Policy, Public Finance and Supply-Side Policy
What the domain tests
Fiscal policy, public finance and supply-side policy examines government spending, taxation, budget balances, debt and policies that shift aggregate supply or productive capacity.
Core rules
- Fiscal policy uses government spending and taxation to influence aggregate demand. Expansionary policy raises spending or cuts taxes; contractionary policy does the opposite.
- Budget deficit = government spending − tax revenue in a year; national debt is the accumulated stock of borrowing.
- Direct taxes fall on income and profits; indirect taxes fall on spending. Progressive taxes take a rising proportion as income rises; regressive taxes take a falling proportion.
- Automatic stabilisers reduce the multiplier during booms and support demand in recessions.
- Supply-side policies aim to raise potential output: education, infrastructure, deregulation, labour-market reform, competition policy and tax incentives.
Worked example
Government spending falls by N$2 billion and the marginal propensity to consume is 0.8. The multiplier is 1/(1−0.8)=5, so aggregate demand could fall by up to N$10 billion. In practice, crowding out, imports and saving leakages reduce the effect. If the economy is near full capacity, the fall may mainly reduce inflation rather than output.
Traps
A deficit is a flow; debt is a stock. Progressive is not the same as proportional. Supply-side policy is not just tax cuts; it must raise productive capacity. Fiscal policy has recognition, implementation and impact lags.