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What Is Fiscal Policy?: Reem Heakal

1. Fiscal policy refers to the measures governments use to influence and stabilize the economy through manipulating tax rates and levels of government spending. 2. Governments use fiscal policy along with monetary policy to direct economic goals, with fiscal policy focusing on tax rates and spending while monetary policy focuses on money supply. 3. Fiscal policy aims to balance tax rates and spending to stimulate or curb economic growth and curb inflation, but finding the right balance can be difficult and requires close monitoring to avoid unintended consequences like high inflation.

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82 views

What Is Fiscal Policy?: Reem Heakal

1. Fiscal policy refers to the measures governments use to influence and stabilize the economy through manipulating tax rates and levels of government spending. 2. Governments use fiscal policy along with monetary policy to direct economic goals, with fiscal policy focusing on tax rates and spending while monetary policy focuses on money supply. 3. Fiscal policy aims to balance tax rates and spending to stimulate or curb economic growth and curb inflation, but finding the right balance can be difficult and requires close monitoring to avoid unintended consequences like high inflation.

Uploaded by

AngelaLouiseSimpson
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Define fiscal policy


Study principles of taxation
What are the uses of fiscal policy
What are the uses of fiscal incentives
Study national income

Fiscal policy is the means by which a government adjusts its spending levels and tax
rates to monitor and influence a nation's economy. It is the sister strategy to
monetary policy through which a central bank influences a nation's money supply.
Transcript of Fiscal Policy of the Philippines. Fiscal Policy Fiscal Policy refers to the
"measures employed by governments to stabilize the economy, specifically by
manipulating the levels and allocations of taxes and government expenditures.

What Is Fiscal Policy?


By Reem HeakalAAA |
Fiscal policy is the means by which a government adjusts its spending levels and
tax rates to monitor and influence a nation's economy. It is the sister strategy
to monetary policy through which a central bank influences a nation's money
supply. These two policies are used in various combinations to direct a country's
economic goals. Here we look at how fiscal policy works, how it must be
monitored and how its implementation may affect different people in an economy.
Before the Great Depression, which lasted from Sept. 4, 1929 to the late 1930s
or early 1940s, the government's approach to the economy was laissez-faire.
Following World War II, it was determined that the government had to take a
proactive role in the economy to regulate unemployment, business cycles,
inflation and the cost of money. By using a mix of monetary and fiscal policies
(depending on the political orientations and the philosophies of those in power at
a particular time, one policy may dominate over another), governments are able
to control economic phenomena.
How Fiscal Policy Works
Fiscal policy is based on the theories of British economist John Maynard Keynes.
Also known as Keynesian economics, this theory basically states that
governments can influence macroeconomic productivity levels by increasing or
decreasing tax levels and public spending. This influence, in turn, curbs inflation

(generally considered to be healthy when between 2-3%), increases employment


and maintains a healthy value of money. Fiscal policy is very important to the
economy. For example, in 2012 many worried that the fiscal cliff, a simultaneous
increase in tax rates and cuts in government spending set to occur in January
2013, would send the U.S. economy back to recession. The U.S. Congress
avoided this problem by passing the American Taxpayer Relief Act of 2012 on
Jan. 1, 2013.
Balancing Act
The idea, however, is to find a balance between changing tax rates and public
spending. For example, stimulating a stagnant economy by increasing spending
or lowering taxes runs the risk of causing inflation to rise. This is because an
increase in the amount of money in the economy, followed by an increase in
consumer demand, can result in a decrease in the value of money - meaning that
it would take more money to buy something that has not changed in value.
Let's say that an economy has slowed down. Unemployment levels are up,
consumer spending is down and businesses are not making substantial profits. A
government thus decides to fuel the economy's engine by decreasing taxation,
which gives consumers more spending money, while increasing government
spending in the form of buying services from the market (such as building roads
or schools). By paying for such services, the government creates jobs and wages
that are in turn pumped into the economy. Pumping money into the economy by
decreasing taxation and increasing government spending is also known as
"pump priming." In the meantime, overall unemployment levels will fall.
With more money in the economy and fewer taxes to pay, consumer demand for
goods and services increases. This, in turn, rekindles businesses and turns the
cycle around from stagnant to active.
If, however, there are no reins on this process, the increase in economic
productivity can cross over a very fine line and lead to too much money in the
market. This excess in supply decreases the value of money while pushing up
prices (because of the increase in demand for consumer products). Hence,
inflation exceeds the reasonable level.

For this reason, fine tuning the economy through fiscal policy alone can be a
difficult, if not improbable, means to reach economic goals. If not closely
monitored, the line between a productive economy and one that is infected by
inflation can be easily blurred.
And When the Economy Needs to Be Curbed
When inflation is too strong, the economy may need a slowdown. In such a
situation, a government can use fiscal policy to increase taxes to suck money out
of the economy. Fiscal policy could also dictate a decrease in government
spending and thereby decrease the money in circulation. Of course, the possible
negative effects of such a policy in the long run could be a sluggish economy and
high unemployment levels. Nonetheless, the process continues as the
government uses its fiscal policy to fine-tune spending and taxation levels, with
the goal of evening out the business cycles.
Who Does Fiscal Policy Affect?
Unfortunately, the effects of any fiscal policy are not the same for everyone.
Depending on the political orientations and goals of the policymakers, a tax
cut could affect only the middle class, which is typically the largest economic
group. In times of economic decline and rising taxation, it is this same group that
may have to pay more taxes than the wealthier upper class.
Similarly, when a government decides to adjust its spending, its policy may affect
only a specific group of people. A decision to build a new bridge, for example, will
give work and more income to hundreds of construction workers. A decision to
spend money on building a new space shuttle, on the other hand, benefits only a
small, specialized pool of experts, which would not do much to increase
aggregate employment levels.
The Bottom Line
One of the biggest obstacles facing policymakers is deciding how much
involvement the government should have in the economy. Indeed, there have
been various degrees of interference by the government over the years. But for
the most part, it is accepted that a degree of government involvement is

necessary to sustain a vibrant economy, on which the economic well-being of the


population depends.
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