Fiscal & Supply-side Policies (AQA A Level Economics): Exam Questions

Extract B: Unemployment and real wages According to a recent study on wage growth, the youngest worker today would need to wait nearly 80 years to see the average real wage in the UK double from its current level. At just 4.2%, unemployment in the UK is at its lowest level in decades. It should be the best of times, but data from the Office for National Statistics (ONS) show that the percentage of people who are ‘underemployed’, often working on zero-hours contracts, is greater than it was during the financial crisis of 2007–08. Some claim this is the true cause of poor real wage growth.

Supply-side reforms to labour markets are meant to boost productivity but can be damaging for some workers. Unregulated labour markets can lead to inequality and poor pay, which also reduces government tax revenue. Workers who are only temporarily employed can experience a lack of stability and firms may have little incentive to invest in human capital. Consequently, these workers may not get the opportunity to develop new skills. Firms may also face higher costs from replacing workers who leave because they feel undervalued.

It can be argued that supply-side reforms have gone too far in creating a highly flexible workforce and the government needs to do more in terms of protecting the nation’s workers. There are calls for some restoration of trade union powers, more rights for workers on zero-hours contracts and measures to raise pay to ensure that workers feel the benefits of employment.

Source: News reports, 2018

Extract B (lines 13–14) states: ‘It can be argued that supply-side reforms have gone too far in creating a highly flexible workforce and the government needs to do more in terms of protecting the nation’s workers’.

Using the data in the extracts and your knowledge of economics, evaluate the view that free market supply-side reforms to labour markets are beneficial to the UK economy.

In 2017, the UK’s annual budget deficit was 2.3% of GDP, the lowest level since 2001. In 2017, the UK’s deficit on the current account of the balance of payments fell to 3.3% of GDP, the lowest level since 2011. Explain the possible causes of a falling budget deficit.

Extract F: Scottish income tax

In most of the UK, reducing the budget deficit has focused on austerity rather than tax rises. However, the Scottish Government has announced that from April 2018, Scotland will have different rates of income tax to the rest of the UK, with changes that will see higher earners pay more and lower earners pay less. There will be a new tax band of 21% for those earning more than £24 000. The higher rate of tax will be increased from 40% to 41% and the top rate from 45% to 46%. A starter rate of 19% will also be introduced. The move to a ‘five-band’ income tax system should mean that nobody earning less than £33 000 in Scotland will pay more tax than they do now.

Estimates show that 55% of Scottish taxpayers will pay less compared to the rest of the UK under the new system, with higher earners paying more. Someone in Scotland earning £150 000 will pay £1774 more than if they lived elsewhere in the UK, with someone earning £40 000 paying £140 more. The extra revenue raised will be used to give public sector workers a 3% pay rise for those earning less than £30 000, and a 2% rise for those earning more than that, and will help towards the cost of providing superfast broadband to all premises in Scotland by 2021.

Some business leaders have warned that Scotland cannot afford to be associated with higher taxation than the rest of the UK. The Finance Minister for Scotland, Derek Mackay, claimed the changes could raise an additional £164 million and were necessary to “mitigate UK budget cuts, protect our NHS and other public services, support our economy and tackle inequality in our society”. He said the tax reforms would make “Scotland's income tax system even fairer and more progressive”. He resisted a bigger increase in the top rate of tax for those earning more than £150 000, aware that high earners may find ways to avoid paying it.

Source: News reports, 2017

Extract F (line 1) states ‘In most of the UK, reducing the budget deficit has focused on austerity rather than tax rises.’ Using the data in the extracts and your knowledge of economics, evaluate the view that there is a strong case for significant increases in UK income tax rates.

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After considering Extract E, and the original evidence in Extracts A, B, C and D, would you recommend that the Government should increase its spending on housing? Justify your recommendation

In the 2016 Autumn statement, the UK Chancellor of the Exchequer, Philip Hammond, officially abandoned the government’s policy of trying to achieve a budget surplus by 2020. While some criticise the government for failing to achieve its fiscal target, others argue that the government should be doing more to help the supply side of the economy.

Explain how fiscal policy can be used to try to improve the supply side of an economy.

In the 2016 Autumn statement, the UK Chancellor of the Exchequer, Philip Hammond, officially abandoned the government’s policy of trying to achieve a budget surplus by 2020. While some criticise the government for failing to achieve its fiscal target, others argue that the government should be doing more to help the supply side of the economy.

Evaluate whether achieving a budget surplus is a desirable objective of economic policy.

Between 2011 and 2016, UK unemployment fell from a high of 8.5% to 4.8%. Some argue that government attempts to reduce unemployment inevitably lead to trade-offs with other macroeconomic policy objectives.

Explain how government policies can reduce the natural rate of unemployment.

The Government has ruled out the possibility of a rise in VAT before 2020 but other indirect taxes may increase. It has also stated that the personal income tax allowance will be increased from £10 800 in 2015/16 to £12 500 by 2020, and plans to cut the main rate of corporation tax from 20% to 17%.

Explain how changes in both government spending and taxation might affect the level of economic activity.

The Government has ruled out the possibility of a rise in VAT before 2020 but other indirect taxes may increase. It has also stated that the personal income tax allowance will be increased from £10 800 in 2015/16 to £12 500 by 2020, and plans to cut the main rate of corporation tax from 20% to 17%.

Evaluate the economic consequences for the UK economy of a significant shift in the burden of taxation from direct taxes to indirect taxes.