Practise public spending, taxation, deficits, debt and macro policy through data, diagrams and country evaluation, including TNC controls and policy limits.
From 2017 to 2021 public expenditure as a proportion of GDP rose from 25.1% to 29.5% in Azerbaijan and from 12.5% to 15.9% in India. Evaluate possible causes of an increase in public expenditure as a proportion of GDP in a developing economy of your choice.
Between 2014 and 2019 France's public expenditure as a proportion of GDP fell from 57.2% to 55.6\%.
Which one of the following is the likely impact of a decrease in public expenditure?
A decrease in unemployment
A decrease in crowding out
An increase in injections
An increase in inflationary pressures
The Government of Hungary operates an income tax system in which the proportion of income paid in tax by individuals remains constant as incomes increase.
Which one of the following can be deduced from this information?
Hungary has a progressive tax system
Hungary has a regressive tax system
Hungary has a proportional tax system
Hungary has a specific tax system
Sources for use with Section B
The economy of Pakistan
Figure 1 National debt, $ billions, 2018–2022
Figure 2 Rupee–US dollar exchange rate, January 2022 to June 2022
Extract A Economic outlook Between January and June 2022 Pakistan’s currency, the rupee, depreciated against the US dollar. This was mainly as a result of rising global inflation rates and the strong appreciation of the US dollar. However, economists expected the external value of the rupee to increase against the US dollar in the third quarter of 2022. They anticipated 5 that the dollars earned by Pakistan from its exports would be greater than the dollars paid for its imports and debt servicing. Pakistan experienced a significant decline in foreign currency reserves from $16 billion in June 2021 to $10 billion in June 2022. Many economists believed that the economy could be on the verge of an economic collapse in the third quarter of 10 2022. In June 2022, Pakistan’s central bank, the State Bank of Pakistan (SBP), informed Pakistan’s Government that the country’s rising foreign currency gap would have a negative impact on its ability to import. The SBP claimed that the rising foreign currency gap was likely to increase further because of higher debt servicing 15 payments. To prevent these reserves from running out, the SBP suggested a temporary ban on the import of non‑essential goods. Pakistan’s Government borrowed $1.2 billion from the IMF to prevent a further fall in foreign currency reserves. This financial support enabled the Government to reduce its current account deficit of the balance of payments and to help finance the 20 country’s national debt. The loan from the IMF required the Government of Pakistan to meet certain conditions. These included a reduction in the fiscal deficit, partly by the removal of fuel and energy subsidies. The IMF also required Pakistan’s central bank to raise its base rate of interest to stabilise the rupee. 25 Previous governments of Pakistan have not always met the terms of their loan agreements with the IMF. For example, the fiscal deficit has not been reduced significantly because the government collects very little revenue from direct taxes, especially from the booming property market. Large houses cost anywhere between $500 000 and $2 million to purchase but the owners only pay a small proportion as 30 tax. The IMF proposed that high‑income households should pay significantly more income tax than low‑income and middle‑income households.
With reference to the information provided and your own knowledge, discuss the likely macroeconomic effects of an increase in income tax rates, aimed at high-income households, on the economy of Pakistan.
In 2021 it was estimated that a large proportion of the fiscal deficits in both Brazil and Suriname was structural.
To what extent is a structural fiscal deficit more serious than a cyclical fiscal deficit? Refer to a developing country of your choice in your answer.
Sources for use with Section B
The economy of Iran
Figure 1 Annual real GDP growth rate, Q1 2010–Q4 2020
Figure 2 Monthly inflation rate, as measured by the Consumer Price Index (CPI), January 2010–December 2020
Figure 3 National debt, % of GDP, 2010–2020
Extract A Trade restrictions
When Iran’s President, Mr Hassan Rouhani, was elected in 2013, he promised that his Government would solve Iran’s economic crisis. He said that he would save the country’s economy from collapsing and create positive relationships with the rest of the world. However, when Mr Rouhani resigned as President in June 2021 many economists claimed that his Government had not kept its promises.
During 2013 Mr Rouhani started discussions with the USA and other advanced economies to remove the trade restrictions imposed on Iran’s exports and imports. These restrictions had been imposed in response to Iran’s production of nuclear energy that was above the permitted international limit. After two years of negotiations, Mr Rouhani came to an agreement with these countries and the trade restrictions were gradually reduced. This resulted in an increase in oil exports, Iran’s main source of export revenue.
However, the US Government accused Iran of breaking the agreement and reimposed trade restrictions in 2018. As a result, Iran suffered a significant decline in oil exports and foreign direct investment. This led to a 75% fall in the external value of the country’s currency, the Rial, against the US dollar. Subsequently, there was a fall in Iran’s GDP, an increase in its unemployment rate and an increase in its inflation rate. In 2020 Iran experienced a trade deficit of $11.68 billion, having had trade surpluses between 2005 and 2018.
Extract B Economic development
Since 2018 the Iranian Government has implemented a strategy of diversification into non-oil exports in order to promote economic development. It has focused on a strategy of industrialisation and infrastructure development, particularly by investing in Iran’s telecommunications industries. As a result, the number of people with access to broadband increased from 590 000 in 2014 to 95 million in 2021. The number of people with access to mobile phones also increased from 59.4 million in 2013 to 131 million in 2021. However, the Iranian Government restricts the content that its citizens can access.
In addition, the Government has privatised many state-run companies. Consequently, many Iranians have invested a substantial amount of their savings in the country’s volatile stock market.
With reference to Figure 3, analyse two disadvantages of an increase in Iran's national debt.
Between 2008 and 2018, income inequality, as measured by the Gini coefficient, increased from 0.43 to 0.51 in Angola and from 0.34 to 0.41 in Bulgaria.
Evaluate government policies that could be used to reduce income inequality in a developing country of your choice.
In 2021 the governments of 136 countries agreed to set a global minimum corporation tax rate of 15%. The aim of this agreement was to make it more difficult for transnational companies (TNCs) to avoid paying corporation tax.
Which one of the following is also a measure that governments may use to control TNCs?
Cutting costs of bureaucracy
Improving access to banking
Increasing indirect taxes
Regulation of transfer pricing
Sources for use with Section B
Inflation and labour markets in developed economies
Figure 1 Annual inflation rate for selected countries (%), as measured by the consumer price index (CPI), Q1 2020–Q4 2021
Sources for use with Section B Inflation and labour markets in developed economies Figure 1 Annual inflation rate for selected countries (%), as measured by the consumer price index (CPI), Q1 2020–Q4 2021 7 6 5 4 % 3 2 1 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2020 2020 2020 2021 2021 2021 2021 New Zealand United States of America United Kingdom
Extract A Rising rates of inflation
In 2021 many developed countries experienced an increase in the rate of inflation. Average price levels increased as a result of disruptions to global supply chains. These were caused by restrictions that had been in place during the global health crisis. As developed countries eased these restrictions, demand for goods, services and energy 5 increased. There was also a significant rise in average house prices. Rising rates of inflation are a challenge for central banks, especially for developed countries that have an inflation target of 2%. The central banks of these countries can adjust their monetary policy instruments to meet this target. Nevertheless, these instruments are less effective in tackling inflation created by a lack of supply. 10 There are problems facing central banks when applying monetary policies to reduce the rate of inflation. One problem is the inability of policymakers to control the rising rate of inflation caused by external factors. Another problem is estimating whether the increase in the rate of inflation is temporary or permanent. Policymakers who believe that this is a temporary issue suggest that the rise in the rate of 15 inflation is as a result of short-term external shocks. They attribute it to a one-off increase in supply chain disruptions and a one-off increase in consumer demand. By contrast, policymakers who believe that this is a permanent issue indicate that the increase in the average price level is a result of rising wages.
Extract B Labour markets
Many developed countries have ageing populations and a falling proportion of people of working age. Since the global health crisis there has been instability in global labour markets. Many workers have retired early whilst others have left the workforce to focus on other personal objectives. There has also been a decline in international migration. As 5 a result of this fall in the labour supply, many companies have been forced to decrease production. This represents a considerable threat to global economic recovery. The critical question is whether workers will rejoin the labour force or whether employers and policymakers will need to adapt to a world in which labour becomes an even scarcer resource. In the USA more than four million workers have left the labour force since the 10 crisis. However, employment in the eurozone has almost returned to its pre-crisis level and the labour force participation rate has risen rapidly. For example, in France and Spain this rate is already higher than it was before the crisis. Employers are preparing for a future in which they will need to offer greater incentives to attract more workers back into the labour market. 15
Examine two 'problems facing central banks when applying monetary policies to reduce the rate of inflation' (Extract A , lines 11-12).