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An increase in the level of indirect and direct taxation will imply controlling the inflation in the state. UK government increased VAT from 15% to 17.5% to 20% and income taxes increased from 45% to 50% for income above 150,000 pounds. Indirect taxes hurt MPC as it diminishes with an increase in indirect taxes (Jappelli and Pistaferri, 2014). The real income of people contracts and AD falls. The rise in the demand for goods while the supply is intact will result in the rise of prices of general goods (Bhattarai and Trzeciakiewicz, 2017). This will be controlled by levying higher tax rates to control inflation. Inflation is widening the economic gap between high-income and low-income groups of the state and there is an increase in poverty. Direct tax will directly reduce the purchasing power of households whereas indirect tax will make specific goods expensive so that the supply of these goods is managed. An increase in indirect and direct taxes will also imply an increase in government revenue. This revenue is used by the government for infrastructure development and stabilizing the economy by keeping poverty under control (Blakeley, 2018). The Laffer Curve implies that after a certain point of the tax base, a further increase will reduce the incentive to invest in ventures and putting factors to use. This is vital to consider while studying the impact on government revenue as it will increase with diminishing rate initially but raising the taxes continuously will lead to a decrease in the tax revenue collected by the government (de Oliveira and Costa, 2015). It can be hence discerned that increase in direct and indirect taxes will initially increase the tax revenue but after a certain point, it will start diminishing as the factors will be put in better yielding areas by the households. Disposable income of people contracts due to increasing income tax slab. Laffer curve is inverse U which implies This can lead to tax avoidance and tax evasion as people will be reluctant to pay tax. MPC will remain low for high-tax payers and therefore consumption will not be affected much. The impact depends on high tax ratepayers. (Blakeley, 2018).
In the year 2019-20, the UK government budgeted 842 billion pounds for public expenditure and the fiscal deficit in the same year was 2.6% amounting to 57 billion pounds. UK's cyclical net borrowing comprised 2% of GDP in 2017-18. 84.7% of GDP was allocated to public sector debt and 36.4% of GDP comprised of government revenue while spending was 38.5% of GDP (Mose, 2020). Maintaining a structural budget deficit means the excess of public expenditure over revenues in the time of optimum economic growth and sustainable employment rate (Quilter-Pinner and Hochlaf, 2018). This deficit is beneficial to maintain the national debt level low when the economy had recovered. It also helps to maintain the optimum credit rating of the nation. It leads to a reduction in interest rates as government credit ratings improve and confidence in the economy is revived. It also helps the nation to address other economic shocks and mitigate the risk of unforeseen adversities such as Brexit, Covid-19, China-US war with complying with IMF's fiscal space. For the future generation, the government must aim at reducing the cost of debt and increase benefits (Bhattarai and Trzeciakiewicz, 2017). But it will also imply suffering for the present generation due to recession and higher taxation. Fiscal policy needs to eliminate weak growth by automatic stabilizers or discretionary or expansionary policy concerning zero-bound monetary policy. The budget deficit will imply scope for economic diversification and optimum use of scarce resources. General government borrowing was 2.7% of GDP that amounted to 60.3 billion pounds in 2020 due to Covid-19. A fiscal deficit implies ber economic growth as households will have more purchasing power (Bhattarai and Trzeciakiewicz, 2017). This will lead to further industrialization and advancements that will lead to economic and national wealth development. A budget deficit will imply high AD and saving surplus for the recession. A budget deficit will also imply investment in public welfare and national HealthCare by NHS. The UK government can achieve high economic growth by attaining a structural budget deficit (Quilter-Pinner and Hochlaf, 2018).
Bhattarai, K. and Trzeciakiewicz, D., 2017. Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis. Economic Modelling, 61, pp.321-338.
Blakeley, G., 2018. Fair dues: Rebalancing business taxation in the UK.
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