Economics
Fiscal Expansion
Fiscal expansion refers to the government's use of increased spending and/or reduced taxes to stimulate economic growth and boost aggregate demand. This policy is often employed during economic downturns to counteract recessionary pressures and promote employment and investment. By injecting more money into the economy, fiscal expansion aims to stimulate consumer and business activity, ultimately supporting overall economic recovery.
Written by Perlego with AI-assistance
Related key terms
1 of 5
10 Key excerpts on "Fiscal Expansion"
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
17.4 Using Fiscal Policy to Fight Recession, Unemployment, and Inflation Expansionary fiscal policy increases the level of aggregate demand, either through increases in government spending or through reductions in taxes. Expansionary fiscal policy is most appropriate when an economy is in recession and producing below its potential GDP. Contractionary fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases in taxes. Contractionary fiscal policy is most appropriate when an economy is producing above its potential GDP. 17.5 Automatic Stabilizers Fiscal policy is conducted both through discretionary fiscal policy, which occurs when the government enacts taxation or spending changes in response to economic events, or through automatic stabilizers, which are taxing and spending mechanisms that, by their design, shift in response to economic events without any further legislation. The standardized employment budget is the calculation of what the budget deficit or budget surplus would have been in a given year if the economy had been producing at its potential GDP in that year. Many economists and politicians criticize the use of fiscal policy for a variety of reasons, including concerns over time lags, the impact on interest rates, and the inherently political nature of fiscal policy. We cover the critique of fiscal policy in the next module. 17.6 Practical Problems with Discretionary Fiscal Policy Because fiscal policy affects the quantity of money that the government borrows in financial capital markets, it not only affects aggregate demand—it can also affect interest rates. If an expansionary fiscal policy also causes higher interest rates, then firms and households are discouraged from borrowing and spending, reducing aggregate demand in a situation called crowding out.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
30.4 Using Fiscal Policy to Fight Recession, Unemployment, and Inflation Expansionary fiscal policy increases the level of aggregate demand, either through increases in government spending or through reductions in taxes. Expansionary fiscal policy is most appropriate when an economy is in recession and producing below its potential GDP. Contractionary fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases in taxes. Contractionary fiscal policy is most appropriate when an economy is producing above its potential GDP. 30.5 Automatic Stabilizers Fiscal policy is conducted both through discretionary fiscal policy, which occurs when the government enacts taxation or spending changes in response to economic events, or through automatic stabilizers, which are taxing and spending mechanisms that, by their design, shift in response to economic events without any further legislation. The standardized employment budget is the calculation of what the budget deficit or budget surplus would have been in a given year if the economy had been producing at its potential GDP in that year. Many economists and politicians criticize the use of fiscal policy for a variety of reasons, including concerns over time lags, the impact on interest rates, and the inherently political nature of fiscal policy. We cover the critique of fiscal policy in the next module. 30.6 Practical Problems with Discretionary Fiscal Policy Because fiscal policy affects the quantity of money that the government borrows in financial capital markets, it not only affects aggregate demand—it can also affect interest rates. If an expansionary fiscal policy also causes higher interest rates, then firms and households are discouraged from borrowing and spending, reducing aggregate demand in a situation called crowding out.
eBook - PDFMacroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
242 Part 3 Fiscal and Monetary Policy aggregate demand opens up an expansionary gap, which in the long run results in a leftward shift of the short-run aggregate supply curve. This reduction in aggregate sup- ply pushes up prices and reduces real GDP to $17.0 trillion, the economy’s potential. Thus, policy makers initially believe their plan worked, but pushing production beyond the economy’s potential leads only to inflation in the long run. Given the effects of fiscal policy, particularly in the short run, we should not be sur- prised that elected officials might try to use it to get reelected. Research suggests that public officials use fiscal policy to boost their reelection chances. This has created what some argue is a political business cycle, which results from the economic fluctuations that occur when discretionary policy is manipulated for political gain. During an elec- tion year, incumbent presidents use expansionary policies to stimulate the economy. For example, a study of 18 industrial economies over three decades found that incumbents boosted healthcare spending during election years. 1 There is also evidence that munici- pal officials, just before an election, spend more on those public goods most visible to the electorate, such as city parks. 2 11-3b Lags in Fiscal Policy The time required to approve and implement fiscal legislation may hamper its effectiveness and weaken discretionary fiscal policy as a tool of macroeconomic stabilization. Even if a fiscal prescription is appropriate for the economy when proposed, the months and sometimes years required to approve and implement legislation means the medicine could do more harm than good. The policy might kick in only after the economy has al- ready turned itself around.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
574 Part 7 Fiscal and Monetary Policy aggregate demand opens up an expansionary gap, which in the long run results in a leftward shift of the short-run aggregate supply curve. This reduction in aggregate sup- ply pushes up prices and reduces real GDP to $17.0 trillion, the economy’s potential. Thus, policy makers initially believe their plan worked, but pushing production beyond the economy’s potential leads only to inflation in the long run. Given the effects of fiscal policy, particularly in the short run, we should not be sur- prised that elected officials might try to use it to get reelected. Research suggests that public officials use fiscal policy to boost their reelection chances. This has created what some argue is a political business cycle, which results from the economic fluctuations that occur when discretionary policy is manipulated for political gain. During an elec- tion year, incumbent presidents use expansionary policies to stimulate the economy. For example, a study of 18 industrial economies over three decades found that incumbents boosted healthcare spending during election years. 1 There is also evidence that munici- pal officials, just before an election, spend more on those public goods most visible to the electorate, such as city parks. 2 25-3b Lags in Fiscal Policy The time required to approve and implement fiscal legislation may hamper its effectiveness and weaken discretionary fiscal policy as a tool of macroeconomic stabilization. Even if a fiscal prescription is appropriate for the economy when proposed, the months and sometimes years required to approve and implement legislation means the medicine could do more harm than good. The policy might kick in only after the economy has al- ready turned itself around.
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
Clinton’s 1992 campaign made economic growth a focus of its attacks on Bush, and his 1996 campaign emphasized the strength of the economy. In 1996, a healthy economy helped Clinton defeat Bob Dole. And in the election of 2004, supporters of George W. Bush made economic growth a major focal point of their campaign against John Kerry. More recently, Barack Obama’s successful campaign for president had economic issues as a leading concern with the U.S. recession beginning in 2008. This was more than just campaign rhetoric, however. By law the government is responsible for the macroeconomic health of the nation. The Employment Act of 1946 states: It is the continuing policy and responsibility of the Federal Government to use all practical means consistent with its needs and obligations and other essential consid-erations of national policy to coordinate and utilize all its plans, functions, and resour-ces for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare conditions under which there will be afforded useful employment opportunities, including self-employment for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power. Fiscal policy is one tool that government uses to guide the economy along an expansionary path. In this chapter, we examine the role of fiscal policy—government spending and taxation—in determining the equilibrium level of income. Then we review the budget process and the history of fiscal policy in the United States. Finally, we describe the difference in fiscal policy between industrial and developing countries. Fiscal policy includes government spending on the provision of goods and services as well as infrastructure. In this photo, workers create mud bricks in the desert. The bricks will be used in infrastructure construction projects. Such activities are often provided by government and funded by taxpayers.
eBook - ePub- (Author)
- 2023(Publication Date)
- Wiley(Publisher)
contractionary fiscal policy ).Hence, a key concept is the budget surplus or deficit, which is the positive or negative difference between government revenue and expenditure for a fixed period of time, such as a fiscal or calendar year. Government revenue includes tax revenues net of transfer payments; government spending includes interest payments on the government debt. Analysts often focus on changes in the budget surplus or deficit from year to year as indicators of whether the fiscal policy is getting tighter or looser. An increase in a budget surplus would be associated with contractionary fiscal policy, while a rise in a deficit is an expansionary fiscal policy. Of course, over the course of a business cycle, the budget surplus will vary automatically in a countercyclical way. For example, as an economy slows and unemployment rises, government spending on social insurance and unemployment benefits will also rise and add to aggregate demand. This is known as an automatic stabilizer . Similarly, if boom conditions ensue and employment and incomes are high, then progressive income and profit taxes are rising and also act as automatic stabilizers increasing budget surplus or reducing budget deficit. The great advantage of automatic stabilizers is that they are automatic and do not require the identification of shocks to which policy makers must consider a response. By reducing the responsiveness of the economy to shocks, these automatic stabilizers reduce output fluctuations. Automatic stabilizers should be distinguished from discretionary fiscal policies, such as changes in government spending or tax rates, which are actively used to stabilize aggregate demand. If government spending and revenues are equal, then the budget is balanced
eBook - PDFPublic Sector Economics
Made Simple
- D. I. Trotman-Dickenson(Author)
- 2014(Publication Date)
- Made Simple(Publisher)
Contractionary policy. This is applied to check inflation, which has been defined by Hugh Dalton (a chancellor of the exchequer) in the now famous phrase, Too much money, chasing too few goods'. Fiscal and monetary measures need, therefore, to reduce the amount of money in circulation or to increase the supply of goods to restore the equilibrium. Towards this end a government will budget for a surplus that will require the following measures: Budget (Surplus) Revenue side Expenditure side increase (i) direct taxation decrease (i) current government expenditure on (ii) indirect taxation goods and services (iii) national insurance (ii) transfer payment contributions (iii) capital expenditure investment At the same time, measures are needed to encourage industry to increase the supply of goods and services by means of grants and tax allowances that would result in investment, leading to greater competitiveness and produc-tive capacity. The problem is that grants increase public expenditure, and allowances reduce tax revenue. Higher personal tax may produce a disin-centive to work (see p. 102). Higher tax on profits reduces the incentive to increase the supply of goods and services and the ability to finance new investment out of a company's own resources. Both expansionary and contractionary fiscal policy may have to be rein-forced by monetary measures. 242 Public Sector Economies In economic jargon stagflation refers to a situation when stagnation and inflation exist at the same time—as occurred in the 1970s and early 1980s. It is characterised by unemployment and rising prices occurring simultaneously. Expansionary policies that help to reduce unemployment, increase inflation. Contractionary policies that reduce inflation, increase unemployment.
eBook - PDF- Irvin Tucker(Author)
- 2018(Publication Date)
- Cengage Learning EMEA(Publisher)
342 PART 3 • The Macroeconomy and Fiscal Policy The key to the amount of real GDP growth achieved from a stimulus package depends on the size of the MPC. What proportion of the government spending increase or tax cut is spent for consumption? The answer means the difference between a deeper or milder recession as well as the speed of recovery. What are estimates of real-world multipliers? In Congressional testimony given in July 2008, Mark Zandi, chief economist for Moody’s Economy.com, provided estimates for the one-year multiplier effect for several fiscal policy options. The spending multiplier varied from 1.36 to 1.73 for different federal government spending programs, such as food stamps, extended unemployment insurance benefits, aid to state governments, or bridges and highways. The tax multiplier also varied from 0.27 to 1.29 for different temporary tax cut plans. Recent studies confirm these estimates and point to the fact that a more complex multiplier is at play, which takes into account a mar-ginal propensity of taxation as well as a marginal propensity to import foreign goods that we do not take into consideration here. 15–1d Using Fiscal Policy to Combat Inflation So far, Keynesian expansionary fiscal policy, born of the Great Depression, has been pre-sented as the cure for an economic downturn. Contractionary fiscal policy, on the other hand, can serve in the fight against inflation. Exhibit 6 shows an economy operating at point E 1 on the classical range of the aggregate supply curve, AS. Hence, this economy is producing the full-employment output of $14 trillion real GDP, and the price level is 220. In this situation, any increase in aggregate demand only causes inflation, while real GDP remains unchanged. Suppose Congress and the president decide to use fiscal policy to reduce the CPI from 220 to 215 because they fear the wrath of voters suffering from the consequences of infla-tion.
eBook - PDF- John E. Marthinsen(Author)
- 2020(Publication Date)
- De Gruyter(Publisher)
For instance, it is possible for government expenditures to encourage gross private domestic investment if it enlarges mar-kets, opens new business opportunities, and creates favorable expectations. The construction of a new highway may increase service investments along the road, such as gas stations and restaurants, and provide incentives for businesses to lo-cate near communities that can now be accessed more easily. Summary of the Fiscal Multiplier Figure 13.3 captures the effect that government borrowing-and-spending have on a nation ’ s real GDP and GDP Price Index. In the absence of any fiscal multi-plier, aggregate demand increases from AD 1 to AD 2 . The fiscal multiplier, with-out any weakening effects, increases aggregate demand from AD 2 to AD 3 , but once the weakening forces are considered, aggregate demand falls from AD 3 to AD 4 . The net result is an increase in aggregate demand from AD 1 to AD 4 . Government Surpluses Surpluses occur when governments spend less than they receive in tax reve-nues and fees. Commonly, surpluses are thought to be contractionary because Government Surpluses 377 falling government expenditures and rising taxes reduce aggregate demand. Therefore, when taxes exceed spending, the government is often viewed as tak-ing more away from aggregate demand than it contributes. As was the case with government budget deficits, economic forces in the three principal macroeconomic markets react to mitigate (but not completely offset) the contractionary impact of these surpluses. In the real goods and serv-ices market, as real GDP falls, tax revenues fall, government transfers rise, and imports fall. In the real credit market, the surplus increases the supply of real credit, thereby reducing the real interest rate and stimulating consumption and investment spending (see Figure 13.4).
- Philip Arestis, Carolina Troncoso Baltar, Daniela Magalhães Prates, Philip Arestis, Carolina Troncoso Baltar, Daniela Magalhães Prates(Authors)
- 2017(Publication Date)
- Palgrave Macmillan(Publisher)
These findings are important, because they provide some perspective to the common critique that the govern- ment was irresponsible in its expansionary policy through public expend- iture during 2011–2014. On the contrary, the total primary expenses during the second Fiscal Expansion sub-period (2011–2014) increased at a similar rate to the fiscal consolidation period (1999–2004); and slowed down compared to the first expansionist sub-period (2005–2010), although not enough to compensate for the slowdown in revenue. A more reasonable criticism can be levied, based on theoretical and empirical foundations, on the inefficiency of this new mix of fiscal policy 230 R.O. Orair and S.W. Gobetti in regaining economic growth. The empirical estimates of Orair et al. (2016), for example, support this conclusion by indicating that the mul- tipliers for subsidies are not significant or not persistent, unlike the mul- tipliers for public investments, which can be over 1.5 during recessions. From a theoretical standpoint, Kalecki (1943) introduced the dis- cussion of business cycles in economic theory by showing how during recessions, when opposition to an expenditure policy based on public debt by the ‘market interest group’ is reduced, arises a perspective that the intervention must preferably occur through stimuli to the private sector. However, this is not the most adequate path to reactivate the economy, compared to an alternative of accelerating public investments and stimulating mass consumption. Additionally, it faces a practical dif- ficulty due to the uncertain reaction of entrepreneurs. If the recession is profound, entrepreneurs can be pessimistic about the future and meas- ures tend to have a small effect on investment. Analysing the Brazilian experience, it is possible to identify some factors that contributed to the uncertain and pessimistic scenario.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
