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Fiscal Policy and Economic Performance

Fiscal Policy can be used to manage economic performance - below are the kind of data response questions you might find in an AS examination.

Graph A

Graph B

Extract C

Shadow Chancellor Ed Balls suggested the Government could cut income tax by 3p, raise the income tax threshold to above £10,000 or increase tax credits for working people.

He said it would be "fairer and quicker" to cut VAT - as Labour has previously called for - but added that the Chancellor would be unwilling to admit his "mistake" in raising the sales tax to 20%.

In an article for The Sunday Times, Mr Balls warned of lasting damage to the economy if the coalition did not take action in the March 21 Budget to help squeezed households and promote growth.

"Without that decisive action in the Budget to boost growth, I fear we are in for a lost decade of slow growth and high unemployment which will leave a permanent dent in our nation's prosperity," he wrote.

His intervention comes after credit ratings agency Moody's last week put Britain on negative outlook, warning that it could lose its AAA standard. Unemployment figures were also up again, with youth joblessness reaching another record high. Inflation, while falling in the latest update, continues to outstrip wages.

Mr Balls said the coalition had not just gone "too far and too fast" with spending cuts but also with tax rises, including the 2.5% hike in VAT. "That is why the Chancellor should announce a temporary reversal of his VAT rise," he said.

Speaking to BBC1's Andrew Marr Show later, Mr Balls repeated his call for a VAT cut to spark growth, claiming it was the "fastest and fairest way" to temporarily boost demand. He added: "We need some stimulus into our economy to get the economy moving. To get growth and jobs back is the only way to get the deficit down."

Tory deputy chairman Michael Fallon said: "This Government's credible plan to start living within its means is keeping interest rates low for families and businesses.

"But Ed Balls has clearly learnt nothing from his time as Gordon Brown's right-man. He wants billions of pounds of more borrowing and more debt, exactly how Labour got us into this mess in the first place."

The Guardian 19.2.12


Define the term economic growth. (5 marks)

Using the period from 1990 to 2009 on graphs A and B, identify two significant points of comparison.  (8 marks)

Extract C states that a stimulus should be used to boost the economy.  Explain TWO ways in which fiscal policy can do this.  (12 marks)

Using the data and your knowledge of recent economic events, assess the contribution that fiscal policy can have on economic performance.  (25 marks)