Transcript ###Macroeconomic Policies - PowerPoint Presentation
Macroeconomic Policies IGCSE Economics
Macroeconomic Policies
Monetary Policy
Monetary Policy
Attempts to influence the level of economic activity (the amount of buying and selling in the economy) through changes to the amount of money in circulation and the price of money – short-term interest rates.
Interest rates the key area of Monetary Policy
Monetary Policy
Short-term interest rates set by Bank Indonesia Senior officials meet to decide on rates The ‘official rate’ is the rate at Bank Indonesia will lend to the financial system and influences the structure of all other interest rates
Monetary Policy These are UK figures
Monetary Policy
Basis of Monetary Policy is that there is a long run relationship between the amount of money and inflation Demand for Money – the amount people wish to hold as cash as opposed to other assets The Supply of Money – the amount of money in circulation in the economy
Monetary Policy
The Classical Quantity Theory of Money:
MV = PY
(where M = the money stock, V = velocity of circulation, P = price level and Y = level of national income More formally:
Monetary Policy
M d = k PY
P is the price level where: Y is the level of real national income M d is demand for money for transactions purposes K = proportion of national income held as transactions balances In equilibrium M d So: P = 1/kY x M = M s A rise in Ms will lead to a proportional rise in P
Monetary Policy
Supply of Money:
Narrow Money circulation (M0) – notes and coins in Broad Money money held in bank and building society accounts (M4) – Notes and coins plus A rise in either (ceteris paribus) might signal a rise in aggregate demand (AD)
Monetary Policy
The Interest Rate Transmission Mechanism The process by which a change in interest rates feeds through to AD
The Interest Rate Transmission Mechanism 1
Credit Individuals
Consumption
Loans Interest Rates Borrowing Firms New Loans
Investment
Existing Loans Margins Costs Employment
Consumption
The Interest Rate Transmission Mechanism 2
Disposable Income Existing
Consumption
Interest Rates Mortgages Property Equity New Demand for New Housing
Investment
Savings
Consumption
The Interest Rate Transmission Mechanism 3
Mp Dm Appreciation Xp Dx Interest Rates Exchange Rates
Balance of Payments
Mp Dm Depreciation Xp Dx
Supply Side Policy
Supply Side Policy
Intention is to shift the aggregate supply curve to the right, increasing the long term productive capacity of the economy Tend to be long-term policies Arguments about how effective they are – e.g. lowering taxes increases incentives, reducing welfare dependency increases the urge to find work
Supply Side Policy
Inflation AS 2.3% 2.0% AS1 AD Increases in long-term capacity can help the economy to grow without undue pressure on inflation.
Yf Yf2 Real National Income
Supply Side Policies
Policies aim to influence productivity and efficiency of the economy Key feature – open up markets and de-regulate to improve efficiency in the working of markets and the allocation of resources
Supply Side Policy
Main areas of policy:
Labour Market
– reduce impediments to free market, reduce bureaucracy and ‘red tape’ – flexible labour markets Reduce power of trade unions Short term contracts Flexible working arrangements Hiring and firing Contracts, terms and conditions, pay Criticism of such policies is that they put the needs of employers above those of workers which can lead to exploitation particularly where the workers have few powers
Supply Side policies continued
Privatisation.
The privatisation of state enterprises to raise money and efficiency BCA and perhaps some of Pertamina and Garuda
Supply Side Policy
Tax Reform: Tax reform to encourage people to work Improving access to training and education
Supply Side Policy
Education and Training: National Qualifications framework – coherent set of qualifications Expansion of vocational qualifications Expansion of university access
Supply Side Policy
Incentives and technology: Tax reform to encourage incentives and entrepreneurial spirit Incentives to develop new technology – investment Regional policies to encourage enterprise, investment, location, expansion. Transmigrasi These policies take a long time to work
Fiscal Policy
Fiscal Policy
Influencing the level of economic activity though manipulation of government income and expenditure Associated with Keynesian Demand Management Policies Now seen in wider terms:
Fiscal Policy
Influence Aggregate Demand – Tax regime influences consumption (C) and investment (I) Government Spending (G) Influences key economic objectives Acts as an ‘automatic stabiliser’ BUT:
Fiscal Policy
Also used to influence non-economic objectives and provide framework for supply side policy e.g. education and health, poverty reduction, welfare reform, investment, regional policies, promotion of enterprise, etc.
Government Income
Tax Revenue Sale of Government Services – e.g. prescriptions, passports, etc.
Borrowing (PSNCR)
Public Sector Income
700 600 500 400 300 200 100 0 19 90 -9 1 19 91 -9 2 19 92 -9 3 19 93 -9 4 19 94 -9 5 19 95 -9 6 19 96 -9 7 19 97 -9 8 19 98 -9 9 19 99 -0 0 20 00 -0 1 20 01 -0 2 20 02 -0 3 20 03 -0 43 20 04 -0 53 20 05 -0 63 20 06 -0 73 20 07 -0 83 20 08 -0 93 Public sector total receipts1 £ billion Public sector total receipts1 % GDP
Year
Source: http://www.hm-treasury.gov.uk/media//E3CCB/PublicFinancesDatabank280104.XLS
41 40 39 38 37 36 35 34 33
Government Income (£ billion)
Inland Revenue
Income Tax (gross of tax credits) Income Tax Credits Corporation Tax Windfall Tax Petroleum Revenue Tax Capital Gains Tax Inheritance Tax Stamp Duties NICs
Total Inland Revenue 1998 99
88.4
-1.9
30.0
2.6
0.5
2.0
1.8
4.6
55.1
183.2
1999 00
95.7
-1.8
34.3
0.0
0.9
2.1
2.1
6.9
56.4
196.5
2000 01
106.1
-1.0
32.4
0.0
1.5
3.2
2.2
8.2
60.6
213.4
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
2001 02
110.3
-2.3
32.0
0.0
1.3
3.0
2.4
7.0
63.2
216.8
2002 03
112.6
-3.4
2003 04
118.3
-4.3
29.5
0.0
1.0
1.6
2.4
7.5
64.6
215.8
28.1
0.0
1.2
2.2
2.5
7.5
72.5
228.0
Government Income (£ billion)
Customs and Excise
VAT Fuel Duties Tobacco Duty Spirits Duties Wine Duties Beer and Cider Duties Betting and Gaming Duties Air Passenger Duty Insurance Premium Tax Land Fill Tax Climate Change Levy Aggregates Levy Customs Duties and Levies
Total Customs and Excise
2.7
1.5
0.8
1.2
0.3
0.0
0.0
1998 99
52.3
21.6
8.2
1.6
1.5
2.1
94.0
3.0
1.5
0.9
1.4
0.4
0.0
0.0
1999 00
56.4
22.5
5.7
1.8
1.7
2.0
97.3
3.0
1.5
1.0
1.7
0.5
0.0
0.0
2000 01
58.5
22.6
7.6
1.8
1.8
2.1
102.2
3.1
1.4
0.8
1.9
0.5
0.6
0.0
2001 02
61.0
21.9
7.8
1.9
2.0
2.0
104.9
3.1
1.3
0.8
2.1
0.5
0.8
0.2
2002 03
63.5
22.1
8.1
2.3
1.9
1.9
108.7
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
3.2
1.3
0.8
2.3
0.6
0.8
0.3
2003 04
69.1
22.8
8.1
2.4
2.0
1.9
115.7
Government Income (£ billion)
VED Oil Royalties Business Rates Council Tax Other Taxes and Royalties
Net Taxes and NICs conts
Interest and Dividends Gross Operating Surplus and Rent Other Receipts and Accounting Adjustments
Current Receipts 1998 99
4.6
0.3
14.7
12.2
7.5
316.6
5.0
18.2
-5.3
334.5
1999 00
4.9
0.4
15.4
13.1
7.9
335.4
4.3
18.1
-0.7
357.2
2000 01
4.3
0.6
16.3
14.1
8.5
359.3
6.0
18.8
-3.8
380.4
2001 02
4.3
0.5
17.9
15.2
9.4
369.1
4.7
19.9
-5.7
387.9
2002 03
4.3
0.4
18.5
16.9
10.2
374.9
4.5
19.0
-5.2
393.2
2003 04
4.8
0.0
18.4
18.8
11.2
196.7
4.4
19.4
-1.8
418.7
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
Government Income – Inland Revenue 2003-04 Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
Government Income – Customs and Excise 2003-04 Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
Other Government Income 2003-04 Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
Fiscal Policy
Need to remember subtleties in use of fiscal policy
Adjustment of income tax allowances rather than rates of income tax Extending or amending range of goods covered by VAT Changing the rules under which tax has to be paid – married persons allowances, inheritance taxes, stamp duties, etc.
Abolishment of certain tax allowances – MIRAS (Mortgage Income Relief At Source) Accusations of ‘stealth taxes’ – much of it is a ‘tinkering’ with the tax system to achieve certain aims – mostly non-economic (governments these days, for example, rarely ‘increase taxes’ to dampen down the economy)
Be aware of these subtleties when you are writing!
Government Expenditure
Social Security Law and Order Emergency Services Health Education Defence Foreign Aid Environment Agriculture Industry Transport Regions Culture, Media and Sport
Public Spending
500.0
450.0
400.0
350.0
300.0
(£bn)
250.0
200.0
150.0
100.0
50.0
Cas h (£bn) 0.0
Real Term s (£bn) per cent of GDP Source: http://www.hm-treasury.gov.uk
Ye ar
Public Sector Net Cash Requirement (PSNCR) 53 43 33
£bn
23 13 3 -7 -17 1991 92 1992 93 1993 94 1994 95 1995 96 1996 97 1997 98 1998 99 1999 00 2000 01 2001 02 2002 03 Source:http://www.hm-treasury.gov.uk/media//E3CCB/PublicFinancesDatabank280104.XLS
Central government Local authority General government Public corporations Public sector
The Golden Rule!
Fiscal policy framework
The Government's fiscal policy framework is based on the five key principles set out in the Code for fiscal stability transparency, stability, responsibility, fairness and efficiency . The Code requires the Government to state both its objectives and the rules through which fiscal policy will be operated. The Government's fiscal policy objectives are:
The Golden Rule!
over the medium term, to ensure sound public finances and that spending and taxation impact fairly within and between generations; and over the short term, to support monetary policy and, in particular, to allow the automatic stabilisers to help smooth the path of the economy.
The Golden Rule!
These objectives are implemented through two fiscal rules, against which the performance of fiscal policy can be judged. The fiscal rules are:
the golden rule
and : over the economic cycle, the Government will borrow only to invest and not to fund current spending;
the sustainable investment rule
economic cycle.
: public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level. Other things being equal, net debt will be maintained below 40 per cent of GDP over the
The Golden Rule!
The fiscal rules ensure sound public finances in the medium term while allowing flexibility in two key respects: the rules are set over the economic cycle. This allows the fiscal balances to vary between years in line with the cyclical position of the economy, permitting the automatic stabilisers to operate freely to help smooth the path of the economy in the face of variations in demand; and the rules work together to promote capital investment while ensuring sustainable public finances in the long term. The golden rule requires the current budget to be in balance or surplus over the cycle, allowing the Government to borrow only to fund capital spending. The sustainable investment rule ensures that borrowing is maintained at a prudent level. To meet the sustainable investment rule with confidence, net debt will be maintained below 40 per cent of GDP in each and every year of the current economic cycle. Source of information about the Golden Rule: http://www.hm-treasury.gov.uk/budget/bud_bud03/budget_report/bud_bud03_repchap2.cfm
Crown Copyright, reproduced under licence
Fiscal Policy In Action
Inflation AS 2.5% 2.0% AD 1 AD therefore shifts to the right to AD1 fall to 3% but at a cost of higher inflation unemployment rate of 5% (U = 5%) AD Real National Income U=5% U=3%
Fiscal Policy In Action
Fiscal Policy influences AD in the short term but can be used to affect AS in the long run – depending on the nature of the policy.
Try your hand at Fiscal Policy by going to the Virtual Economy (http://www.bized.ac.uk/virtual/economy/p olicy/advisors/fiscal.htm)