Using the Data and Your Economic Knowledge, Assess the View That a Reduction in Income Tax Is the Best Way to Improve the Performance of the Uk Economy in Both the Short Run and Long Run.

1282 Words Jul 22nd, 2014 6 Pages
Improvement in the UK economy is usually dependant on the improvement of four major factors, economic growth, balance of payments, unemployment and inflation. This should lead to steady economic growth that would lead to a steady increase in the productive capacity in the economy. Income tax is the percentage of income that people are taxed upon that is given to the government. There are many policies that can be used to tackle these certain goals, for example fiscal and monetary policy. Fiscal is a change in government spending or taxation, an example of fiscal policy is to reduce taxation and thus give consumers more spending power, hopefully increasing economic activity. Monetary policy is centred on interest rates, for example reducing …show more content…
This also improves the distribution of income, a reduction in the unemployment rate with result in households yet having more spending power and yet encouraging more economic growth. An increase in employment will result in an improvement in the budget deficit as there will be a decrease in the demand for welfare benefits, thus improving the economy. The increase in the supply of goods and services (due to an increase in demand) is also expected to reduce demand pull inflation, as there is now less competition for few goods, lowering the prices to a healthy equilibrium. This can be shown in a demand and supply diagram.

However, these long and short term economic improvements are only what is predicted to happen and there negatives to the reduction in income tax. A factor that the government must take into account is the budget deficit, can the government afford to simply cut income tax that is a large source of revenue for the budget. A worsened budget deficit could have devastating impacts upon the economy, for example less people able to have the benefits they require, (this would also reduce demand in the economy as those on benefits generally spend the money they have as they do not have spare to save, this may damage the economy even further) or a reduction in money towards health care. Also, a reduction in income tax does not necessarily mean
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