Economics
Fiscal Stimulus
Fiscal stimulus refers to government policies aimed at boosting economic activity through increased government spending and/or tax cuts. The goal is to stimulate demand and investment, particularly during economic downturns. By injecting funds into the economy, fiscal stimulus aims to create jobs, increase consumer spending, and support overall economic growth.
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10 Key excerpts on "Fiscal Stimulus"
eBook - ePub- James Gosling, Marc Allen Eisner(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
Economic growth carries a number of benefits: increased personal income, resources for investment, new job opportunities, and enhanced citizen support for government and incumbents. Yet economic prosperity cannot be taken for granted. Workers, businesses, and elected public officials reap the benefits of growth and suffer the consequences of decline. In one sense, they are captive of the vagaries of economic cycles and fluctuations. In another sense, however, all share the conviction that government can and should act to stabilize the economy at desired levels of economic performance. Policymakers rely primarily on fiscal and monetary policy to manage the economy. This chapter addresses fiscal policy.Fiscal policy deals with the tax and spending decisions of national governments. In the United States, that means the tax and spending decisions of Congress, as affected by actions of the president. Tax and spending choices influence the national economy by affecting aggregate demand. Government taxes reduce aggregate demand because they take resources away from individuals and businesses that might otherwise be spent. Conversely, tax cuts transfer resources from the public to the private sector and increase after-tax disposable income that can be spent. Tax policy, depending on its structure, can also affect aggregate supply, to the extent that it provides strong incentives for individuals or firms to save and invest rather than spend.Government spending adds to aggregate demand through the purchases that government makes directly or through those made by the recipients of government financial assistance, whether they be individuals or other governmental units. In the latter case, states and local governments in the United States spend federal aid directly or distribute it to individuals who, in turn, spend it. In either case, this added spending increases aggregate demand. Government spending can also influence the level and potential growth of a nation’s economy, depending on the nature of that spending. Government spending on physical infrastructure, such as highways and bridges, and on education, technology development, and basic research can provide the basis for increased productivity and the higher personal income that follows.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(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 - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(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.
No longer available |Learn more- (Author)
- 2012(Publication Date)
- United Nations Publications(Publisher)
In fact, evidence from both advanced and emerg- ing economies indicates that both tax cuts and higher public spending can work – though these fiscal packages need to be carefully designed 40 (IMF, 2008). Of the two, tax cuts tend to be less ef- fective, or at least slower acting, since tax payers may choose to hoard their gains rather than spend them. Government spending on the other hand should deliver a boost more quickly. However, some forms of government spending, such as on infrastructure development, by their very nature, are not easy to turn on or turn off in response to changing economic conditions. Moreover they of- ten take effect only after a time lag, so cannot turn the economy around quickly. Another problem with government spending is that, after a reces- sion is over, it is usually politically difficult to cut spending – which tends to be ‘sticky downwards’. One way of avoiding this is to lock such policies to indicators that reflect the economic cycle – so that, similar to automatic stabilizers, fiscal meas- ures appear and disappear according to economic circumstances rather than to political expediency. Fiscal impact of the crisis A government’s capacity to undertake such stimulus packages will depend, however, upon its fiscal health. This in itself will have been damaged by the economic slowdown through falls in tax revenue, both direct and indirect, resulting in fiscal imbalances. The government may respond either by borrowing, with a corresponding rise in debt. Or it could cut development expenditure – with potentially serious implications for the MDGs.
eBook - ePub- (Author)
- 2023(Publication Date)
- Wiley(Publisher)
We can consider a number of ways that fiscal policy can influence aggregate demand. For example, an expansionary policy could take one or more of the following forms: Cuts in personal income tax raise disposable income with the objective of boosting aggregate demand. Cuts in sales (indirect) taxes to lower prices raise real incomes with the objective of raising consumer demand. Cuts in corporation (company) taxes to boost business profits may raise capital spending. Cuts in tax rates on personal savings to raise disposable income for those with savings, with the objective of raising consumer demand. New public spending on social goods and infrastructure, such as hospitals and schools, boost personal incomes with the objective of raising aggregate demand. We must stress, however, that the reliability and magnitude of these relationships will vary over time and from country to country. For example, in a recession with rising unemployment, it is not always the case that cuts in income taxes will raise consumer spending because consumers may wish to raise their precautionary (rainy day) saving in anticipation of further deterioration in the economy. Indeed, in very general terms, economists are often divided into two camps regarding the workings of fiscal policy. Keynesians believe that fiscal policy can have powerful effects on aggregate demand, output, and employment when there is substantial spare capacity in an economy. Monetarists believe that fiscal changes only have a temporary effect on aggregate demand and that monetary policy is a more effective tool for restraining or boosting inflationary pressures
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
A more complex model of fiscal policy appears in the appendix to this chapter. Topics discussed in this chapter include: 25-1 Theory of Fiscal Policy Our macroeconomic model so far has viewed government as passive. But govern- ment purchases and transfer payments at all levels in the United States total more than $7.0 trillion a year, making government an important player in the economy. From highway construction to unemployment compensation to income taxes to federal defi- cits, fiscal policy affects the economy in myriad ways. We now move fiscal policy to center stage. As introduced in Chapter 3, fiscal policy refers to government purchases, transfer payments, taxes, and borrowing as they affect macroeconomic variables such as real GDP, employment, the price level, and economic growth. When economists study fiscal policy, they usually focus on the federal government, although governments at all levels affect the economy. 25-1a Fiscal Policy Tools The tools of fiscal policy sort into two broad categories: automatic stabilizers and dis- cretionary fiscal policy. Automatic stabilizers are revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy to sta- bilize disposable income and, consequently, consumption and real GDP. For example, the federal income tax is an automatic stabilizer because (1) once adopted, it requires no congressional action to operate year after year, so it’s automatic, and (2) it reduces the drop in disposable income during recessions and reduces the jump in disposable income during expansions, so it’s a stabilizer, a smoother. Discretionary fiscal policy, on the other hand, requires the deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals like full employment, price sta- bility, and economic growth. President Obama’s 2009 stimulus plan, which was enacted by Congress, is an example of discretionary fiscal policy.
eBook - PDFMacroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Government officials first tried to calm financial markets with TARP, then tried to stimulate the economy with the largest fiscal program in history. The economy lost 8.7 million jobs between December 2007 and December 2009. Those jobs returned by 2014, but economic growth during the recovery was still among the weakest on record. Key Concepts Automatic stabilizers 234 Discretionary fiscal policy 234 Expansionary fiscal policy 236 Contractionary fiscal policy 236 Classical economists 238 Employment Act of 1946 239 Political business cycles 242 Permanent income 242 American Recovery and Reinvestment Act 245 Questions for Review 1. Fiscal Policy Define fiscal policy. Determine whether each of the following, other factors held constant, would, in the short run, lead to an increase, a decrease, or no change in the level of real GDP demanded: a. A decrease in government purchases b. An increase in net taxes c. A reduction in transfer payments d. A decrease in the marginal propensity to consume 2. The Multiplier and the Time Horizon Explain how the steep- ness of the short-run aggregate supply curve affects the govern- ment’s ability to use fiscal policy to change real GDP. 3. Evolution of Fiscal Policy What did classical economists as- sume about the flexibility of prices, wages, and interest rates? What did this assumption imply about the self-correcting ten- dencies in an economy in recession? What disagreements did Keynes have with classical economists? 4. Automatic Stabilizers Often during recessions, the number of young people who volunteer for military service increases. Could this rise be considered a type of automatic stabilizer? Why or why not? 5. Permanent Income “If the federal government wants to stim- ulate consumption by means of a tax cut, it should employ a permanent tax cut. If the government wants to stimulate sav- ing in the short run, it should employ a temporary tax cut.” Evaluate this statement.
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).
eBook - PDFPublic Sector Economics
Made Simple
- D. I. Trotman-Dickenson(Author)
- 2014(Publication Date)
- Made Simple(Publisher)
By the 1920s the possibility of unemployment could no longer be dismissed. It palpably existed, and by the 1930s it was an international phenomenon. Keynesian Prescription It is impossible to discuss fully in a few pages, such an important and difficult subject as the management of an economy and the Keynesian point of view. It will therefore be considered in broad outline. In 1936 Lord Keynes published his General Theory of Employment, In-terest and Money, which influenced fiscal policy for several generations to come and has its supporters to this day. Lord Keynes argued that aggregate demand need not equal supply and that by managing aggregate demand a Fiscal Policy to Stabilise an Economy 240 Public Sector Economies Management of Aggregate Demand Fiscal measures can be used to follow policies for: (i) expansion, if the aggregate demand is insufficient to absorb available resources so that there is unemployment, (ii) contraction, when demand is excessive and the price level rises. Expansionary policy. This is achieved by a government budget deficit, so that more money is pumped into the economy by means of public expendi-ture than is taken out in taxation. Budget measures are therefore likely to be as follows: A government will have to borrow to cover the deficit. Capital taxes are of little use in the management of aggregate demand because: (i) their total yield is small (see p. 185), (ii) the revenue generated is not regular, liability to a capital transfer tax arises only when a capital transfer is made, (iii) at a time of recession and falling prices capital gains on the disposal of assets are unlikely and therefore there will not be a tax base for a capital gains tax. A government will therefore rely on taxes on consumption and income. A reduction in direct taxation can be achieved by a cut in: (a) Income tax. A government may reduce tax rates, increase allowances, raise the level of tax thresholds, (b) Corporation tax.
eBook - PDF- (Author)
- 2023(Publication Date)
- United Nations(Publisher)
An additional 24 cents of the investment returns materializes abroad (Huntley, 2014). stimulate aggregate demand in the economy (DeLong and Summers, 2012). Blanchard and Perotti (2002) show that government spending has a positive effect on output while tax increases can negatively affect output. Further, there is increasing evidence of the detrimental effects of fiscal austerity on short- and medium-term growth and employment (Blyth, 2015). In response to the global financial crisis, many governments in developed countries cut fiscal expenditures before their economies had fully recovered, under the expectation of “expansionary fiscal austerity” (Alesina and Ardagna, 2013). Public spending cuts were thought to increase business and consumer confidence, boosting private investment and consumption and, consequently, economic growth. In reality, the cuts negatively impacted economic output for several years, particularly in some euro area economies. As output was permanently affected, attempts to reduce public debt through expenditure cuts and tax hikes were ineffective, illustrating the persistent effects of fiscal shocks and the potentially self-defeating nature of fiscal consolidations (Fatas and Summers, 2018). During the Asian financial crisis from 1997 to 1998, IMF assistance to countries such as Indonesia, the Republic of Korea and Thailand came with strict conditionalities, including sharp cuts in fiscal outlays. The Government of Indonesia, for example, was required to reduce fuel subsidies by raising domestic fuel prices. As a result, fuel prices skyrocketed by 71 per cent in just six months in 1998 (Sijabat, Wee and Suhartono, 2022), leading to mass protests and a political crisis. Price subsidies for rice, flour, sugar and soybeans, which constituted a large part of the consumption basket of the poorest households, were also reduced or eliminated (IMF, 1998b), which worsened food insecurity
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