Types of Fiscal Policy

11 Key excerpts on "Types of Fiscal Policy"

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  Microeconomics and Macroeconomics

  • (Author)
  • 2014(Publication Date)
  • Orange Apple

    (Publisher)

  ____________________ WORLD TECHNOLOGIES ____________________ Chapter- 9 Fiscal Policy & Monetary Policy Fiscal Policy In economics, fiscal policy is the use of government expenditure and revenue collection to influence the economy. Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: • Aggregate demand and the level of economic activity; • The pattern of resource allocation; • The distribution of income. Fiscal policy refers to the use of the government budget to influence the first of these: economic activity. Stances of fiscal policy The three possible stances of fiscal policy are neutral, expansionary and contractionary. The simplest definitions of these stances are as follows: • A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. • An expansionary stance of fiscal policy involves government spending exceeding tax revenue. • A contractionary fiscal policy occurs when government spending is lower than tax revenue. ____________________ WORLD TECHNOLOGIES ____________________ However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax revenues and of some types of government spending, altering the deficit situation; these are not considered to be policy changes.

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  Business Economics

  • Rob Dransfield(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  Fiscal policy is the deliberate manipulation of government expenditure and revenues in order to achieve given policy objectives. At one level this involves the relationship between total public spending and total public revenues. For example, a deficit budget can pump extra spending into the economy whereas a budget surplus would withdraw spending from the economy. Fiscal policy also involves adjusting different types of tax and spending in order to target specific objectives. For example, the government may shift the emphasis from direct to indirect taxes or from regressive to progressive taxes.

  Keynesian economists believe that fiscal policies can be used by the government to stimulate the economy. In contrast neoclassical and monetarist economists believe that there should be a balanced budget.

  Key Ideas Fiscal policy

  • Fiscal policy is government policy designed to use its own spending and the taxes that it raises in order to achieve desired policy objectives such as full employment or economic growth.
  • Whereas monetarists seek to balance government revenues and taxes, Keynesian economists believe that fiscal stimulus can be used to support economic growth and to counteract unemployment.
  • The balance between government spending and taxes is made up by government borrowing (or paying back debt).

  Government expenditure

  • The main area of government expenditure is on welfare, including health, education and social benefits.
  • Government expenditure is one of the main ingredients of GDP.
  • Free market supporters believe in rolling back the size of the government in the economy.
  • Government spending includes central and local government spending.

  Government taxes

  • Progressive taxes take a greater percentage of income from the rich than the poor. Regressive taxes take the greatest proportion from the poor.
  • Direct taxes are deducted directly from a taxpayer’s income at source. In contrast, indirect taxes are collected by a third party on behalf of the government and citizens have a choice as to whether to buy goods with indirect taxes imposed on them.

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  Principles of Economics 3e

  • 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.

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  Economics

  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.

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  Macroeconomics

  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: 11-1 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. 11-1a 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.

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  Public Sector Economics

  Made Simple

  • D. I. Trotman-Dickenson(Author)
  • 2014(Publication Date)
  • Made Simple

    (Publisher)

  The fiscal, monetary and incomes and prices policies of each country have international repercussions. Summary Fiscal Policy to Stabilise an Economy 247 Hirsch, F., and Goldthorpe, ed., Political Economy of Inflation, Harvard University Press, Cambridge, USA, 1978. Hockley, G. C , Public Finance, Routledge and Kegan Paul, London, 1979. Llewellyn, D. T., et al, The Framework of UK Monetary Policy, Heinemann Educa-tional Books, London, 1982. Musgrave, R. Α., and Musgrave, P. B., Public Finance in Theory and Practice, McGraw-Hill, New York, 1980. Peacock, A. T., The Economic Analysis of Government and Related Themes, Martin Robertson, Oxford, 1979. Prest, A. R., and Barr, Ν. Α., Public Finance in Theory and Practice, Weidenfeld and Nicolson, London, 1979. Sandford, C. T., The Economics of Public Finance, Pergamon Press, Oxford, 1981. Samuelson, P. Α., Economics, McGraw-Hill, London, 1980. Tylecote, Α., The Cause of the Present Inflation, The Macmillan Press Ltd., 1981. Exercises 1 Consider why there is a need for a fiscal policy to stabilise an economy. 2 Suggest why fiscal measures may fail to stimulate economic activity. 3 Explain how income tax has a built-in stabiliser. 4 Outline a fiscal policy to achieve an expansionary effect and the problems involved. 5 Suggest how a prices and incomes policy can be used to reinforce fiscal policy to create a contractionary effect. 6 Distinguish between the two types of inflation and suggest appropriate fiscal measures to deal with each one. 7 Why does stagflation present such a serious problem for the chancellor of the exchequer? 8 Outline a policy for controlling the aggregate demand at a time of economic boom. 9 Why are capital taxes of little use in the controlling of an economy. 10 'Monetary policy and fiscal policy are not alternative but complementary policies.' Comment on this statement. 19 Full Employment Fiscal policy to maintain full employment is equivalent to a policy to prevent unemployment.

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  Macroeconomics

  Principles & Policy

  • William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Scott Applewhite; bottom middle, AP Images/Rick Bowmer; bot- tom right, Pool/Getty Images News/Getty Images Summary 1. The government’s fiscal policy is its plan for managing aggregate demand through its spending and taxing pro- grams. This policy is made jointly by the president and Congress. 2. Because consumer spending (C) depends on disposable income (DI), and DI is GDP minus taxes, any change in taxes will shift the consumption schedule on a 458 line diagram. Such shifts in the consumption schedule have multiplier effects on GDP. 3. The multiplier for changes in taxes is smaller than the multiplier for changes in government purchases because each $1 of tax cuts leads to less than $1 of increased con- sumer spending. 4. An income tax reduces the size of the multiplier. 5. Because an income tax reduces the multiplier, it reduces the economy’s sensitivity to shocks. It is, therefore, con- sidered an automatic stabilizer. 6. Government transfer payments are like negative taxes, rather than like government purchases of goods and ser- vices, because they influence total spending only indi- rectly through their effect on consumption. 7. If multipliers were known precisely, it would be possi- ble to plan a variety of fiscal policies to eliminate either a recessionary gap or an inflationary gap. Recessionary gaps can be cured by raising G or cutting T. Inflationary gaps can be cured by cutting G or raising T. 8. Active stabilization policy can be carried out either by means that tend to expand the size of government (by raising either G or T when appropriate) or by means that reduce the size of government (by reducing either G or T when appropriate). 9. Expansionary fiscal policy can mitigate recessions, but it also raises the budget deficit. 10. Expansionary fiscal policy also normally exacts a cost in terms of higher inflation. This last dilemma has led to a great deal of interest in “supply-side” tax cuts designed to stimulate aggregate supply.

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  4.1. Factors Influencing the Mix of Fiscal and Monetary Policy Although governments are concerned about stabilizing the level of aggregate demand at close to the full employment level, they are also concerned with the growth of potential output. To this end, encouraging private investment will be important. It may best be achieved by accommodative monetary policy with low interest rates and a tight fiscal policy to ensure free resources for a growing private sector. At other times, the lack of a good quality, trained workforce or perhaps a modern capital infrastructure will be seen as an impediment to growth; thus, an expansion in government spending in these areas may be seen as a high priority. If taxes are not raised to pay for this, then the fiscal stance will be expansionary. If a loose monetary policy is chosen to accompany this expansionary spending, then it is possible that inflation may be induced. Of course, it is an open question as to whether policy makers can judge the appropriate levels of interest rates or fiscal spending levels. Clearly, the mix of policies will be heavily influenced by the political context. A weak government may raise spending to accommodate the demands of competing vested interests (e.g., subsidies to particular sectors, such as agriculture), and thus a restrictive monetary policy may be needed to hold back the possibly inflationary growth in aggregate demand through raised interest rates and less credit availability. Both fiscal and monetary policies suffer from lack of precise knowledge of where the economy is today, because data appear initially subject to revision and with a time lag. However, fiscal policy suffers from two further issues with regard to its use in the short run. As we saw earlier, it is difficult to implement quickly because spending on capital projects takes time to plan, procure, and put into practice.

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  Demystifying Global Macroeconomics

  • John E. Marthinsen(Author)
  • 2020(Publication Date)
  • De Gruyter

    (Publisher)

  Furthermore, getting these pieces of legislation passed can be challenging to accomplish in the short term. 380 Chapter 13 Fiscal Policy Increasing Tax Rates Raising tax rates is another way to reduce a nation ’ s aggregate demand. If they are imposed on household incomes, the reduced disposable (i.e., after-tax) in-comes cause personal consumption expenditures to fall. As consumption falls, so does aggregate demand. When higher tax rates are imposed on business profits, gross private domestic investment decreases as companies reduce their real investments. In addition, the reduction in after-tax profits cuts dividends and capital gains that, otherwise, would have flowed to the household sector, again, reducing demand. Lower consumption and investment expenditures reduce aggregate de-mand, which lowers production and further reduces household income levels. As household earnings fall, so do their purchases of goods and services, which leads to subsequent rounds of spending cuts and slashed production (i.e., via the fiscal multiplier effect). These cascading rounds of lower demand and in-come wind their way through the economy until equilibrium is eventually re-stored at a lower level of GDP. If successful, contractionary fiscal policies result in lower prices and reduced inflation. At the same time, they may also reduce real GDP, causing unemployment to rise. Lags in Fiscal Policy There is considerable controversy about the effectiveness of discretionary fiscal policies. Among the main reasons for concern and skepticism are its long and variable lags. Fiscal policies have the same three generic lags as monetary policy, namely, the recognition lag, implementation lag, and impact lag, but the dura-tions of these lags can vary substantially from period to period, and they can be quite different from their monetary counterparts.

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  Test Bank for Introductory Economics

  And Introductory Macroeconomics and Introductory Microeconomics

  • John G. Marcis, Michael Veseth(Authors)
  • 2014(Publication Date)
  • Academic Press

    (Publisher)

  MONETARY VERSUS FISCAL POLICY 1 1 Roman set numbers in parentheses refer to pages where the material is discussed in both Introductory Economics, and Introductory Macroeconomics. 1. Which of the following is not a first-order impact of an expansionary monetary policy? (266) a. Increased investment spending. b. Increased aggregate demand. c. Decreased interest rate. D. Increased aggregate supply. e. Increased real gross national product. 2. Which of the following is not a second-order impact of an expansionary fiscal policy? (267) A. Increased taxes. b. Increased interest rates. c. Decreased investment spending. d. Decreased real gross national product. e. Increased demand for credit. 3. Investment tax credits are a tool of fiscal policy which are designed to have the same impact upon the economy as: (269-270) a. a reduction in personal income taxes. b. an increase in federal deficit spending. c. an increase in the rate of inflation. D. a reduction in the rate of interest. e. an increase in the demand for credit. 4. According to Veseth, the presence of a variable lag in monetary policy is dangerous because: (270-271) a. it is difficult to predict what the fiscal reaction will be. b. the size of the money multiplier cannot be predicted. c. it is difficult to predict when interest rates will change. d. the lag between investment spending and changes in aggregate demand is unstable. E. it is difficult to predict when investment spending will change. 5. Contractionary monetary policy and contrac-tionary fiscal policies are similar in their impacts upon: (272-273) a. the supply of credit. b. investment spending. C. aggregate demand. d. interest rates. e. aggregate supply. 6. Assume that the supply of credit is fixed (that is, it does not change with changes in interest rates). An increase in governmental spending in this situation which is financed by borrowing from the public results in: (275-276, Fig. 11-6) a.

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  Macroeconomics

  Principles and Policy

  • William Baumol, Alan Blinder(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 11 Managing Aggregate Demand: Fiscal Policy 223 h ow far the U.S. econom y was from full emplo y ment. Some ar g ued we were basicall y there alread y . Others insisted that f ull emplo y ment came at a rate substantiall y lower than 6 percent. That debate g oes on . A fourth complication is that fiscal policy “bullets” travel slowly: Tax and spending policies a ff ect a gg re g ate demand onl y a f ter some time elapses. Consumer spendin g , f or example, ma y take months to react to an income-tax cut. Because of these time la g s, fiscal policy decisions must be based on forecasts o f the f uture state o f the econom y — f orecasts that are o f ten inaccurate. The combination o f lon g la g s and poor f orecasts ma y occasionall y leave the g overnment fi g htin g the last recession j ust as the new inflation g ets under wa y . And, f inall y , the people aimin g the f iscal “ri f le” are not skilled economic technicians; the y are politicians. Sometimes political considerations lead to policies that deviate mark -edl y from what textbook economics would su gg est. Even when the y do not, the wheels o f Con g ress g rin d s l ow ly. In addition to all of these operational problems, le g islators tr y in g to decide whether to push the unemployment rate lower would like to know the answers to two f urther questions. First, b ecause either hi g her spendin g or lower taxes will increase the g overnment’s bud g et de f icit, w hat are the lon g -run costs of runnin g lar g e bud g et deficits? This is a question we will take u p in depth in Chapter 16. Second, how lar g e is the in f lationar y cost likel y to be? As we know, an expansionar y f iscal polic y that reduces a recessionar y g ap b y increasin g a gg re g ate demand w ill lower unemplo y ment. As Fi g ure 4 reminds us, it also tends to be inflationar y .

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