Note 1--fiscal policy

Fiscal policy is one of the three policies that affect the demand and supply of an economy by adjusting taxation and government spending or borrowing in order to achieve the economic objectives.
Usually,there are two types of fiscal policies which serve the need of economy conversely--expansionary fiscal policy and deflationary fiscal policy.
The former one can also be called reflationary and loose fiscal policy that is used to increase the aggregate demand and then to achieve economic objectives. For example,to solve the unemployment problem and lead to an economic growth,we should decrease the taxation to encourage the consumption and more people to seek jobs and increase government spending to raise the investments.
But if there are too many demands for domestic goods,demand-pull inflation will be created,and so,the deflationary fiscal policy should be implemented by reducing the demand. For instance,increasing the taxation to discourage consumption,some of which maybe on the import goods,can reduce the imports and then reduce the balance of payments deficit.
Now let's concentrate on the components of fiscal policy.
1.Government spending:
1) Transfer payments: Money transferred from one group to the other through the social security system like Job Seekers' Allowance and Child Benefits. This government spending is not included in the national income account for that this spending will not get output as rewards and just welfare benefits to those can't make a living very well with low income ability.
2) Current payments: This spending is about regular payments flowing out of the circular income on goods and services,such as the salaries paid to the NHS or debt interests to other countries.
3) Capital investment: Spending on the capital including infrastructural spending like roads and schools. This part is very essential for the operation of the economy.
P.s. The main areas of government spending are social protection,education,health,defence and debt interest.


2.Taxation:
1) Direct taxation: Tax levied on the income,wealth and benefit of people like corporation tax,income tax,capital gains tax. Here,we can refer the progressive tax that it rises as income rises. Therefore,direct tax is always progressive tax.
2) Indirect tax: Tax on the spending of goods and services,such as exercise duties and value add tax. They are generally regarded as regressive tax that it falls as income goes up or takes bigger percentage from income of the poor.

3.Budget: The changes in government spending and taxation will influence the budget,resulting in deficit or surplus. The former one means government spending more than tax revenue which is always considered to be reduced.
Therefore,sometimes the government will make deliberate changes in tax or government spending to influence a particular situation. On the other hand,automatic stabiliser is common because it is the natural changes in tax and government spending in terms of different stage of the economy.

Generally,policy to affect demand is more common but in fact,the aggregate supply can also be influenced by the supply capacity of the economy.
1)Labour incentive: If the income tax is reduced,people who are unemployed will be encouraged to find jobs which can help increasing the supply of goods and services.
2)Capital investment: Increasing government spending will raise the investment that providing means of the solution structural unemployment.
3)The productivity of supply: Government spending on the education and training can improve the skills and knowledge of the labour and increase the productivity in case of the supply-side inflation.

However,there are some disadvantages of fiscal policy.
1) It takes time to draw up the new tax codes and government spending plans.
2) Government spending is inflexible. For example,when government start the building of the roads,it's difficult to stop it if you want to reduce the spending.
3) It's not easy to measure the changes in tax which should base on the accurate information.
4) The policy may be affected by other countries' policy and activity,like the debt interest paid.

P.s. I'm just trying to think about this myself without notes. So,if there is something i should know but i didn't think about,please point them out. Hoho!Thanks.