Fiscal Policy
What is Fiscal Policy? Government use of taxes and government spending to affect the economy
Types of Fiscal Policy Expansionary Fiscal Policy Used to increase aggregate demand in a weak economy Contractionary Fiscal Policy Used to reduce aggregate demand and slow the economy if expanding too rapidly
Tools of fiscal policy Public Transfer Payments Progressive Income Taxes Other Taxes Government Spending
Demand side economics Until Great Depression, government did little to influence economy John Maynard Keynes proposed Keynesian economics: Idea that during recession government should stimulate aggregate demand Basis of demand-side fiscal policy—policy to stimulate aggregate demand
Gov’t & demand-side policies The Role of Government Keynes argued for government spending to create jobs, increase income Also lower taxes to encourage consumer spending, business investment “Stimulus Spending”
Gov’t & Demand-Side Policies Sometimes demand-side policies work; e.g. World War II production Difficult to discontinue popular programs after recession Demand-side policies ineffective for stagflation slow economic growth with unemployment and inflation
Supply side economics Supply-side economists favor cutting individual, corporate taxes to encourage people to work, save, invest more reducing highest tax brackets frees income to most likely investors Favors lower government spending: if less revenue is needed, government can lower taxes Favor less government regulation: cuts production costs, increases aggregate supply
The Federal Deficit and debt All levels of government struggle to achieve a balanced budget Budget surplus occurs when government takes in more than it spends Budget deficit occurs when government spends more than it takes in Deficit spending—spending more than revenues for specific budget year National debt—the total amount of money the government owes
The federal deficit and debt Four main reasons for deficit spending National emergencies usually require massive spending beyond normal budget Building public goods and services is expensive, work takes years Public projects to stimulate, stabilize weak economy need large sums of money Entitlement programs that people depend on are expensive
The national debt The Current Debt On September 20, 2017, national debt was $20,164,808,111,509.90 (U.S. Treasury)$19,786,440,755,303.80 Federal deficits and debt increased during 1980s, 1990s In 1981, debt was 33 percent of GDP; in 2006 was nearly 68% $20,164,808,111,509.90 Today (Q4 2017) 105%!!!