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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 26
o
The global financial crisis (2007-2008) and the covid pandemic (2020-?): Keynes popular again.
WHAT KEYNES GOT RIGHT
Keynes’s influence is sll enormous in terms of:
Macroeconomics.
Budgetary policy.
The macroeconomic effects of taxes and spending.
MACROECONOMICS
It is nowadays generally accepted that:
Aggregates
are important.
The connectedness of economic phenomena is important (e.g. if wages fall, then aggregate demand will fall, and then
profits will fall)
The economy is like a hydraulic system, in which everything affects everything else
BUDGETARY POLICY
It is nowadays generally accepted that:
It is a mistake for a government to cut spending during a recession.
It is a mistake for a government to increase taxes during a recession.
Examples of governments using budgetary policy
o
The GFC – John Key spent money on the cycleway
o
The COVID pandemic – the wage subsidy
But should the government
cut
taxes during a recession?
o
You could argue that it makes sense to do this
If the government cuts taxes, this will tend to produce a deficit (i.e. more spending, less money),
which is what Keynes suggests a government should do
The result is that individual taxpayers are leſt with more of their money, and thus are inclined to
spend more of it and increasing aggregate demand
o
However, Keynes was not keen on this approach
Keynes would prefer to leave the tax system and increase government spending
This is because increasing government spending will ensure that the money is spent – whereas there
is no guarantee that taxpayers will spend more money if they retain more income from paying less tax
Parcularly, if there was a recession, some taxpayers may be inclined to save the extra
money
THE MACROECONOMIC EFFECTS OF TAXES AND SPENDING
Most countries’ tax and welfare systems are
automacally countercyclical
. This means:
When the economy is
expanding
:
What happens to the government’s
revenues
from income tax and GST?
o
People’s incomes increase, so revenue from income tax increase
o
People’s incomes increase, so they will tend to consume more goods and services, so revenue from GST
increase
Page 27
What happens to taxpayers’
average rate
of income tax?
o
People’s incomes increase, so they may be pushed to a higher tax bracket, so they will pay more average rate
of tax
o
Even if not pushed to a higher tax bracket, a larger part of their income is subject to the highest rate of tax, so
they will pay more average rate of tax
What happens to the government’s
spending
?
o
Remains the same
What happens to the government’s
predicted deficit/surplus
?
o
The amount of tax increases, so if the government is ancipang a surplus, it will get bigger without the
government doing anything – the government only needs to maintain the tax system and spending program
o
If the government is ancipang a deficit, it will get smaller and maybe move to a surplus
Therefore, the government’s tax and welfare system is
automacally countercyclical – it doesn’t have to do anything
and the economy will automacally behave as Keynes expects it to (i.e. the government should operate at a surplus)
When the economy is in
recession
:
What happens to the government’s
revenues
from income tax and GST?
o
Incomes go down, so their liability to income tax decreases and the government collects less tax
o
Incomes go down, so people might spend less on consumpon, so revenue from GST decreases
What happens to taxpayers’
average rate
of income tax?
o
Average rate of income tax decreases because people might fall down a tax bracket
o
Even if they don’t fall down a tax bracket, a smaller amount of their income is subject to the maximum tax rate
What happens to the government’s
spending
?
o
Spending tends to increase (e.g. during a recession, unemployment increases, so there is increased spending
on unemployment benefits)
What happens to the government’s
predicted deficit/surplus
?
o
If the government is already budgeng for a deficit, it will get bigger
o
It budgeng for a surplus, it will get smaller and may turn into a deficit –
which is what Keynes said should
happen in a recession
Again, most economies tend to be automacally countercyclical because the government doesn’t have to make any
changes to the tax system or its spending programme, and the effect tends to be countercyclical and produces the
effect Keynes said it should
WHAT KEYNES GOT WRONG
From the 1930s unl the 1970s, many governments, on the basis of Keynesian theory, aempted to
fine-tune
their economies
(i.e. trying to me adjustments to their tax systems and spending programmes so as to have the appropriate Keynesian effect
med against the business cycle). This is now generally regarded as a mistake because:
The government has insufficient informaon; and
It is too difficult to predict the ming of the consequences.
Nowadays, there is no need to fine-tune the economy because of the macroeconomic effect of taxing and spending.
WHAT KEYNES SHOULD NOT BE BLAMED FOR
By the mid-1970s, most western governments were seriously in debt, but that wasn’t Keynes’s fault because:
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