Fiscal Policy

BY: Himanshu Verma, Anurag Mani Tripathi, OmkarNath, Chandra mani

What Is Fiscal Policy? Fiscal policy is the federal governments policy especially dealing with use of taxation and borrowings.

Goals of a Fiscal Policy

Influence

the amount spent and produced in an economy Meant to meet potential output To have less movements in the business cycle

Fiscal Policy and the Economy

The

total level of government spending can be changed, to help increase or decrease the output of the economy.

Benefits Of Fiscal Policies

Fiscal Policy has two benefits as a stabilization tool: its regional focus, and the direct impact it has on spending Regional Focus:
Fiscal policy can focus on particular regions for example, unemployment rates are the highest or inflation is at its worst Automatic stabilizers have the greatest effect in regions that need them the most
Impact

on Spending:

Fiscal policy has a more straightforward impact when altering government purchases than monetary policy, since the government itself initiates the change

Drawbacks of Fiscal Policy

Delays: Recognition Lag the amount of time it takes policymakers to realize that a policy is needed Decision Lag the amount of time needed to formulate and implement an appropriate policy Impact Lag the amount of time between a policys implementation and its having an effect on the economy Political Visibility: Voters are likely to respond more favourably to increases in government purchases and cuts in taxes Public Debt: Public Debt - the total amount owed by the federal government as a result of its past borrowing Public Debt Charges are the amounts paid out each year by the federal government to cover the interest charges on its public debt

Types Of Fiscal Policies

Expansionary Policies

Fiscal policies that try to increase output are known as expansionary policies. Increasing Government Spending Cutting Taxes

Contractionary Policies Fiscal policies intended to decrease output are called contractionary policies. Decreasing Government Spending Raising Taxes

Usage Of Fiscal Policy

Fiscal

policy can be used to fight both recession or depression and inflation. Government can increase spending during a recession to counteract the decrease in consumer spending.

Impact of Fiscal Policy on Business Environment

Automatic Stabilizers
A

stable economy is one in which there are no rapid changes in economic factors. Certain fiscal policy tools can be used to help ensure a stable economy. An automatic stabilizer is a government tax or spending category that changes automatically in response to changes in GDP or income.

Supply-Side Economics
Supply-side

economics stresses the influence of taxation on the economy. Supply-siders believe that taxes have a strong, negative influence on output.

Balancing the Budget

A

budget surplus occurs when revenues exceed expenditures. A budget deficit occurs when expenditures exceed revenue.

A balanced budget is a budget in which revenues are equal to spending.

Responding to Budget Deficits

The

government can pay for budget deficits by creating money. Creating money, however, increases demand for goods and services and can lead to inflation. The government can also pay for budget deficits by borrowing money.

The Difference Between Deficit and Debt

The

deficit is amount the government owes for one fiscal year. The national debt is the total amount that the government owes.

Fiscal Policy Guidelines

3

principles that guide government fiscal policy: 1) Annually balanced budgets 2) Cyclically balanced budgets 3) Functional finance

Annually balanced budget is the principle that government revenues and expenditures should balanced each year Critics of fiscal policy say annually balanced budget are not necessary for the society and state it as faulty reasoning Cyclically balanced budget is the principle that government revenues and expenditures should balanced over the course of one business cycle

Some Fiscal Policies

Government

revenues and expenditures dont need to balance every year but over one business cycle Function finance is the principle that government budgets should be geared to the yearly needs of the economy Defenders of functional finance are those who believe fiscal policy is a powerful stabilization took The choice of fiscal policy guideline depends on the governments belief in fiscal policy as an effective took for stabilizing the economy 1970s and 1980s Canada believed in functional finance but recently has made unsuccessful attempts to move toward cyclically balanced budgets Canadas change of view came from constant budget deficits and its impact on the economy as a whole

 Government

deficits were highest during recessions during the early 1980s and early 1990s Tax revenues fell with slumping incomes during that time as a result of the automatic stabilizers Discretionary expansionary policy also contributed since federal government increased purchases of goods and services to counteract the effects of sagging outputs and incomes Canada experienced a period of economic growth, noticeably during 1988 where unemployment was under 8%, the economy was at or above potential output but still budgets didnt show a surplus 1990s downturn caused a concern over increased public debt and lowered confidence in discretionary fiscal policies to counteract a recession