Fiscal policy · IGCSE Economics

Uruguay fact file 2023 population 3.5m gross domestic product (GDP) $77.0bn government revenue $10.7bn government budget deficit $2.5bn In 2023, the Uruguayan Government raised the retirement age from 60 to 65. There are concerns about the current high government spending on pensions and it is expected that life expectancy in the country will continue to rise. A higher retirement age will have an impact on the country’s labour force, with most workers employed in the tertiary sector. The average age of Uruguay’s population is increasing due to a fall in the birth rate and emigration of young workers. Many Uruguayan workers emigrate to the United States (US) where wages are higher. However, income inequality is considerably lower in Uruguay than in the US. The tax system in Uruguay is more progressive than in the US, and the Uruguayan Government spends a higher percentage of GDP on education and healthcare. In both Uruguay and the US, there is increasing demand for swimming pools. These use a large amount of water. Demand for some luxury items, such as swimming pools, is increasing in Uruguay. Demand for healthcare is also rising which is likely to increase the number of doctors in Uruguay. Table 1.1 shows the number of doctors per thousand people and life expectancy in selected countries. Table 1.1 Number of doctors per thousand people and life expectancy in selected countries in 2023 doctors life expectancy country (per 1000 people) (years) Angola 0.2 62 Bangladesh 0.8 74 Chad 0.1 53 Indonesia 0.7 68 New Zealand 3.5 83 Uruguay 6.2 79 In 2023, Uruguay experienced its lowest inflation rate for eighteen years. This low level of inflation encouraged investment in the country. It changed the international competitiveness of the country’s products against its main trading partners, which had higher inflation rates. It also had an impact on the cost of debt in the country and firms’ willingness to increase their output. Prices change at different rates in different markets. In several markets in Uruguay, there is only one firm. All of Uruguay’s monopolies can set the price of the products they sell. Having monopoly power can also affect the firm’s average total cost and the quality of what they produce.

Many governments tax petrol. As drivers switch to electric vehicles, this revenue will be lost. However, tax revenue may come from other sources if a country’s production possibility curve (PPC) shifts to the right. Tax revenue may be used for a variety of purposes including subsidising public transport, for example bus transport.

The UK Government imposes an indirect tax on a range of products. However, some goods and services do not have an indirect tax on them. These include books, children’s clothes and cakes. UK clothes firms would like the indirect tax removed from adults’ clothes. In 2023, there were some mergers between UK clothes firms. A year later, the UK Government planned to put an indirect tax on private sector school fees.

Isle of Man fact file 2022 gross domestic product (GDP) $7.0bn insurance industry share of GDP 18.0% GDP growth rate 10.3% unemployment rate 0.7% The Isle of Man is an island located between the United Kingdom (UK) and Ireland. Its geographical location has helped to attract foreign labour and capital. In 2022, it had a very low unemployment rate and high GDP growth rate. The island has the same monetary policy as the UK but sets its own fiscal policy. Some fiscal policy measures have attracted many insurance firms to operate on the island. The Isle of Man is set to generate as much as 75% of its electricity from renewable sources by 2026. A higher percentage of renewable energy generation may reduce pollution and affect health and life expectancy. In addition, energy costs could also decrease which will affect secondary sector firms such as food processors. Table 1.1 shows the percentage of energy obtained from renewable sources and life expectancy in selected countries in 2021. Table 1.1 Percentage of energy obtained from renewable sources and life expectancy in 2021 country percentage of energy life expectancy from renewable sources (years) Bangladesh 1.6% 74.3 Timor-Leste 0.4% 69.5 Iceland 100.0% 83.0 Isle of Man 5.0% 80.5 Luxembourg 85.0% 82.8 Oman 1.9% 72.5 Goods are transported to and from the island by air or sea. The government has increased spending to improve the airport and move the economy’s production possibility curve (PPC). The increased spending was used to increase the number of employees and improve the airport building. This has affected the number of flight cancellations. However, some airport users are still not satisfied. Some industries are also dissatisfied as the government is not funding projects which affect these other industries directly. Firms deciding whether to invest in the Isle of Man consider several influences including the level of demand and labour availability. The market for goods and services on the island is very small. However, there is free trade with neighbouring countries. Foreign workers are attracted by the low cost of living in the Isle of Man. However, some workers stay for only a short period of time before moving to jobs elsewhere.

Senegal fact file 2023 population 19m gross domestic product (GDP) $31bn workers’ remittances as a percentage of GDP 9% Human Development Index (HDI) value 0.517 Senegal, a north‑east African country, has some of its workers employed in other countries. These workers send a percentage of their wages home to relatives. This money is known as workers’ remittances. Due to their relatively low incomes, most Senegalese households spend all of these remittances. However, some households do not spend all of the money they receive when interest rates are high or when confidence is low. A relatively high proportion of workers in Senegal are employed in agriculture. The crops grown in Senegal are affected by extreme heat and droughts. These weather conditions are one reason why the country grows the crop, sorghum, which does not need much water during its growth. Sorghum is low in calories and so can help people who consume it to lose weight. Senegal is a net exporter of sorghum. It is also the largest African exporter of rice after Nigeria. Greater use of capital equipment in the production of both sorghum and rice could affect productivity. This may reduce the deficit on the current account of Senegal’s balance of payments. The Senegalese Government wants to develop the country’s secondary and tertiary sectors to improve the country’s economic performance. It also expects that this will reduce poverty as measured by those living on $6.85 or less a day. Table 1.1 shows GDP per head and the percentage (%) of population living in poverty in selected countries. Table 1.1 GDP per head and percentage (%) of population living in poverty in selected countries in 2023 percentage (%) of country GDP per head ($) population living in poverty Canada 55 520 0.7 Iceland 73 500 0.0 Papua New Guinea 3 010 80.0 Romania 15 820 7.1 Senegal 1 600 75.6 South Africa 6 770 40.1 A related aim of the Senegalese Government is to increase the country’s HDI value. Governments can use fiscal policy measures to improve the three components of their HDI value, including life expectancy. Changes in fiscal policy can also affect the markets for Senegalese products including gold. Among the influences on the price elasticity of demand for gold are changes in income, the availability of substitutes and the extent to which gold is seen as a luxury.

No country, including the United States (US), escapes the economic problem. The US has a high GDP per head. However, it also has a high degree of income inequality. There are both super‑rich billionaires and people living in poverty. In 2023, 12% of US households had one or more members who missed meals because they did not have enough money to buy sufficient food. Some argue that the rich should pay a very high rate of income tax.

Japan has faced significant periods of deflation in recent decades. Despite efforts to stimulate the economy through fiscal policy measures and monetary policy measures, economic growth remains low. Some economists have also argued that the monetary policy used by the central bank is one of the causes of low productivity in Japan.

Lanzarote, a Spanish island, was once an area with very high rates of poverty. However, the rise of tourism has greatly reduced unemployment. The government is trying to attract more workers to the island by using non‑wage factors. Lanzarote’s low taxes also attract workers to the island. Mobility of labour in the island’s economy has also increased.

Street vendors mostly operate outside of the formal economy to avoid government regulation. However, many are now entering the formal economy. This has led to more government revenue, increased productivity and higher economic growth. Some governments plan to take measures to increase the number of firms in the economy.

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In April 2023, a French cosmetics firm merged with an Australian cosmetics firm. It is expected the merger will lower average total cost as the new firm is likely to benefit from greater internal economies of scale. A manager stated that a key aim is to make the firm’s production more sustainable by using raw materials taken from renewable sources. In most countries, the cosmetics firm’s products, including perfume, are taxed at a higher rate than food.

There are several policy measures a central bank or government can use to reduce unemployment. One policy measure a government could use to reduce unemployment is to increase its spending on building houses. The Federal Reserve, the central bank of the US, has two main aims. One is to maintain price stability and the other is to achieve full employment. Some central banks also have economic growth as a target, but none have HDI value as a target.

In 2023, India became the country with the largest population. This may affect the government’s macroeconomic aims. In 2018, the Indian Government cut the country’s corporation (corporate income) tax rate from 35% to 25%. Between 2019 and 2022, India’s inflation rate averaged 6%. Some economists suggested that to achieve its central inflation rate target, the government should cut its spending.

St. Kitts and Nevis fact file 2022 Population 54 800 GDP per head $27 000 Government spending $310m Tax revenue $292m Unemployment rate 5.1% Inflation rate 2.4% Current account balance of the balance of payments –$56m St. Kitts and Nevis is a small, two-island country in the Caribbean. The country’s three main industries are tourism, financial services and agriculture. Tourists are attracted by the country’s beaches, coral reefs, forts, rainforests and shipwrecks. However, if rainforests continue to be cut down and soil erosion continues to pollute the coral reefs, killing off marine life, tourism may be discouraged. The St. Kitts and Nevis Government is also concerned that the social costs of tourism exceed the private costs. St. Kitts and Nevis’s financial services include a growing banking sector. Among the country’s commercial banks are a few foreign multinational companies (MNCs). These MNCs are attracted by the country’s relatively high incomes, the absence of personal income tax and a relatively high literacy rate. Some of the country’s main agricultural products are carrots, onions, peanuts and sweet potatoes. In 2017, the St. Kitts and Nevis Government introduced a training scheme to raise the productivity of onion farmers. Other important industries in St Kitts and Nevis include healthcare and fishing. Table 1.1 shows healthcare spending as a percentage of GDP and life expectancy in six selected countries in 2022. Table 1.1 Healthcare spending as a percentage of GDP and life expectancy in selected countries in 2022 Country Healthcare spending as Life expectancy (years) a % of GDP Canada 12.9 84 Egypt 4.5 75 Haiti 3.3 65 Monaco 1.9 90 St. Kitts and Nevis 5.4 77 Sweden 11.5 83 The small size of St. Kitts and Nevis’s fishing industry means that it imports large quantities of fish. The country’s fishing boats are small and some lack up-to-date equipment. A larger fishing industry, with bigger boats, may bring a number of benefits to the country. Changes in the structure and performance of industries in St. Kitts and Nevis may alter the country’s price level. Between 2018 and 2020, the country experienced deflation. This affected people’s purchasing power, saving and debts. It also affected the country’s exports and firms’ investment decisions.

In 2022, more than a quarter of a million workers, including doctors, left Sri Lanka to work in other countries. This was largely due to economic problems, including an inflation rate of 50% and a concern that unemployment might rise. The Sri Lankan Government increased direct taxation. It also encouraged some public sector workers to work abroad temporarily. People who work abroad often send money home to relatives.

Missions to outer space face the same basic economic problem as that experienced on Earth. The African Space Agency was created to improve science and technology on the African continent. This agency also aims to coordinate trade between African countries to help technological development. This may improve how markets work. In 2021, total government spending on this agency was more than $500 million.

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