FISCAL POLICY Essay Example | Topics and Well Written Essays - 2000 words

FISCAL POLICY - Essay Example 3). Towards meeting the objectives, the UK government adopted two fiscal rules (HM Treasury 2008, p. 3). The first rule is â€Å"the golden rule† that holds government must borrow only to invest and not fund current spending (HM Treasury 2008, p. 3). The second rule is described as the â€Å"sustainable investment rule† and requires that the â€Å"public sector as a proportion of GDP would be held over the economic cycle at a stable rate and prudent level† (HM Treasury 2008, p. 3). In general, under the second rule, â€Å"net debt would be maintained below 40 per cent of GDP over the economic cycle† (HM Treasury 2008, p. 3). The Economist Online Magazine reported January 20th this year that an important component of UK’s fiscal management is the UK government’s policy of â€Å"opening up the public services to competition and private providers to much greater extent than any of its predecessors†. As shown by the graph captured by Figur e 1, however, despite opening up the public services to competition and private providers, both the real and nominal value of public services have been on the rise in the United Kingdom since 1996. ... According to Adam et al. (2010, p. 2), UK taxation in the last thirty years is not much different from the policies that other countries have implemented worldwide: government has increased the share of value added taxes but reduced both specific and income taxes. Yet at the same time, Adam et al. (2010, p. 2) described the UK taxation has been unusual to some extent in the following respects: UK imposed zero VAT to many goods compared to other countries. UK abolished tax relief for mortgage interests. UK has only a small share of tax revenues from social security contributions. UK has an â€Å"unusually† large share from recurrent taxes on buildings. Even if indeed there was redistribution in favour of the poor through taxation, Adam et al. (2010, p. 3) were unsure if inequality in the UK has decreased. This observation appears indicative that reduction of inequality does not constitute to be a main cornerstone of the UK’s tax policy in the UK’s fiscal framework . According to Adam et al., the redistribution in favour of the poor that has taken place was done to strengthen financial work incentives before anything else (2010, p. 3). In summarizing the main tax reforms from 1978 to 2008, Adam et al. (2010, p. 11) pointed out the following: The basic rate from income tax was reduced from 33% to only 20% The top rate of 98% from unearned income and 83% of earnings was reduced to a significantly low 40%. The higher value-added tax higher rate of 12.5% was abolished but the standard rate increased from 8% to 17.5% (recall however that there are relatively many item that are zero-rated in terms of VAT taxes). Capital gains taxes returned to a flat rate. Inheritance taxes replaced capital transfer