Zusammenfassung der Ressource
Fiscal policy
- definition
- decisions by national govt
regarding the nature, level &
composition of govt
expenditure, taxation &
borrowing, aimed at
pursuing econ goals
- GOALS of fiscal policy
- macro level
- econ growth
- job creation
- price stability
- Balance of
Payments stability
- poverty alleviation
- sectoral level
- development of particular econ sectors,
e.g. agriculture, tourism
- pursuing social goals pertaining to particular
sectors, e.g. housing, education, health, etc.
- micro level
- i.e. fiscal action
aimed at a single
econ participant
- improving efficiency by addressing
negative externalities w.r.t. a particular
product, e.g. tobacco, or activity, e.g. toxic
waste disposal
- Combating poverty by intervening
in the market for a product (e.g.
bread subsidy)
- fiscal policy can pursue goals w.r.t. a particular
geographic area
- INSTRUMENTS of fiscal policy
- Macro instruments
- total govt expenditure
- total tax
- budget deficit & debt
- the way in which the
budget deficit is
financed
- Micro instruments
- various expenditure
functions, e.g. education,
health & defense
- votes & programmes
- different kinds of
taxes & their rates
- different dimensions of
public debt, e.g. maturity,
ownership structure, etc.
- Effectiveness of fiscal policy
- explained by
different schools
of thought
- Keynesian economics
- anti-cyclical fiscal policy
- in recessionary conditions govts
should increase spending or reduce
taxes to stimulate AD
- govt's responsibility to
actively manage aggregate
demand so that it equals
aggregate supply at the full
employment level of income
- assumes main role of fiscal
policy is to STABILISE economy
- apart from using taxes & govt
expenditure to stabilise economy,
govt can also use income taxes &
unemployment benefits
- use these "automatic stabilisers" to
trigger changes in tax revenue that
would stabilise AD, income & output
- agreement that these
stabilising instruments can only
REDUCE economic instability,
not eliminate it entirely
- dominated fiscal policy until early
1970's
- called into question with
stagflation brought on by oil
crisis of 1973
- became evident that Keynesian
economics was really about
short-term demand management, but
did not provide a solution to
structural unemployment
- Structural approach
to fiscal policy
- Emerged from growing perception
that anti-cyclical fiscal policy is
ineffective and could in fact make
economy more volatile
- Key aspects
- keep public debt at a
sustainable level by avoiding
high budget deficits or reducing
it to acceptable levels
- keep overall tax burden at
a level that doesn't distort
incentives to work, save &
invest
- income &
substitution
effects NB
- keep govt spending in check to avoid
crowding out private activity, inflationary
financing & disincentive effects of
an excessive tax burden
- Basic assumptions
- market-based solutions to social &
economic situations may not always be
effective, thus direct controls and
interventions may be required from
time to time
- direct interventions supported,
e.g. rent ceilings, import quotas,
wage and price controls
- interventions necessary to restore
growth even though they may
reduce allocative efficiency in the
short-term
- Supply-side economists
- advocate a particular brand of
fiscal policy as a cure for
stagflation
- Use Laffer curve to argue
relative size of govt in
economy is determined by
micro incentives
- recommend a reduction in
marginal tax rates and a
corresponding reduction in
govt spending