According to the research on the react fiscal policy of the UK, with emphasis on taxation, the current trend of a shift in the balance of taxation can be identified. Notably, the direction is from the direct tax to the indirect tax. Also, the increasing government spending and proportional change are also found out. Besides, whether the tax revenue can compensate the government spending is also examined.
In this paper we report the results of an analysis of the direct/indirect taxes and the trends for them and for the government spending. The related factors of fiscal policy we will mention here range from the direct taxes in the taxation area to the exchange rate in the market area. Here in this report we just focus on the taxation policy. This is the current popular measure to achieve the financial objective by UK’s government. After the investigation of applications of the four main components in the fiscal policy, it can be obviously found out that the taxation, especially the direct tax, plays an important part in carrying out fiscal policies in the UK in recent years.
Result and analysis
Taxation
Taxation, according to tutor2u.net, can be defined as “any compulsory levy from individuals, households and firms to central or local government. The British economy imposes a wide range of taxes on people.”
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The direct tax
The direct tax can be defined as the tax imposed on the income of individuals and profits of companies. In terms of type of tax, it is progressive because the tax revenue goes up as the income or profit rises. As shown in the graph below, the tax rate is only 1% for those who earn only 4335 to 4999 pounds a year in 1998-1999; however the figure reached 33% for the extremely high income group, who earn more than 1million pounds a year. () generally, this is because the direct tax was originally set to redistribute the income and make the society fairer.
Actually, the direct tax takes up an important part of the total tax revenue. As shown in the table below, (in billion pounds), the income tax and corporation tax together took up as much as 43% of the total tax yield on average from 1990 to 1997. (Advanced Economies Through Diagram).
Historically, the direct tax rate in the UK was extremely high. Notably the income tax rate once reached 84% in the 1970s (understanding the economy). This is the result of the post-war Welfare State policy and other social benefits, which were the main part of the government spending in the 1950s and 1960s. However, the situation began to change since Mrs. Thatcher came into power. With the will to improve the efficiency of the UK economy, she brought down the rate for the direct tax, which may destroy the incentive for entrepreneur to create opportunities. Even after Tony Blair took office in 1997, the policy was still kept. In other words, there was a trend to reduce the tax rate on direct tax. According to statistic from the Inland Revenue, the tax highest rate is 40% in 2003.
The indirect tax
Compared to the Direct tax, which is placed on the income and profit, indirect tax is imposed on the spending. Generally, there are three types of main indirect tax, namely the VAT (value added tax), tax on tobacco and excise duties on alcohol. Actually, the last type of indirect tax is specific tax. In other words, it is expressed per unit of goods consumed rather than a rater. For example, according to the number from tutor2u.net, wine is charged for 1.12 pounds per bottle, for example.
Restively, the indirect tax revenue was less significant in the past. According to the pie charted shown in the last part, the total of indirect tax only took up 21% of the total tax revenue on average over 1990 to 1995. Compared to the direct tax, indirect tax is said to have less effect on the economy, because it is progressive tax. In other words, as the income goes up, it takes a lower percentage of the total income. As a result, it may in turn boost the incentive to work.
Also, in the case of some goods that are not very price elastic, the rate has been raised overtime. This is well illustrated by the statistics from Tutor2u.net. As shown below, the taxation of cigarette always has an upward trend, albeit a different trend over the past two decades.
Government spending
During the post-war years, most of the government revenue was paid for the Welfare State and NHS because it was very costly. Recently, however, there is a change in these spending. According to statistics from the Oxford University, as shown in the pie chart below, only 15.7% of the total expenditure was spent on Health and Education and Employment in 1997.
Furthermore although the general tax rate has been brought down recently, the revenue of tax is paradoxically higher than before, which indicate that the tax may increase as the tax rate goes down. Notably, in the financial year 2000-2001, the tax revenue in the UK even reached $377 billion.
However, in spite of the increase in tax revenue, the government spending is not compensated. This is well illustrated by the increase of PSBR ( Public Sector Borrowing Requirement), which is equal to public sector spending minus public sector receipt, since 1990.in 1990, according to the statistics from Oxford University, the PSBR was –606 million dollars, but shot up to 45418 million dollars in 1993, although it fell back to 31745 dollars in 1995.
Recommendation and conclusion
The UK government has not only one objective for using the fiscal policy. For instance, full employment, price stability and economic growth are all the aims of the government to use fiscal policy. But in fact, the long term goals always sacrifice for the short term ones. Here the problem is the conflict between full employment and inflation. For the UK government responding to this, it ought to deflate the economy, by giving a suspension to economic growth and an increase in employment. Besides of this, there are also technical problems as the reasons of time lag in the economy. The time lag contains of recognizing these problems the UK government should accelerate its handle speed by improving abilities of staffs and the level of techniques. Although despite with these problems, there are still some issues in the nature and application of fiscal policies here we not mention them all but just main ones.
In summary, fiscal policy, which is well carried out in the UK, is, acing large contributions to the UK economy in recent years. And particularly to taxation changes, which made by UK government, supported the government to regular the level of the economic fluctuation efficiently and directly. The general trends of taxation now are turning from direct taxation mainly to the indirect taxation side. And besides this, the quantity of government spending is rising, and the scope pf it is also being enlarging. Fiscal policy is gradually becoming a mature, dependable and suitable measure to solve the economic problems happen in the UK.
References
An integrated approach to business studies
JEWELL 4TH EDITION
ADVANCED ECONOMICS THROUGH DIAGRAM
ANDREW GILLESPIE
