1. Fiscal Policy

2. Recall - Three Goals of EVERY Economy Stable Prices Low Unemployment
Economic Growth

3. What is Fiscal Policy?
Changes in the expenditures or tax revenues of the federal government, undertaken to promote full employment, price stability and reasonable rates of economic growth.
Fiscal Policy contains two parts:
Government Revenue Collection
Government Spending

4. What is Govt Revenue Collection?
Funds raised through taxing and borrowing to pay for government expenditures
Remember, different levels of government collect different taxes and fees.
Federal ?
State ?
Local ?
Income Tax
Sales Tax
Property Tax

5. What is Government Spending?
Used to provide a variety of services and programs for the public
Can you provide examples for:
Federal government ?
State government ?
Local government ?

6. Fiscal Policy
The debate over how much to tax and how much to spend is often affected by what is happening in the economy
Expansionary Policy
Contractionary Policy
Are we in a period of
Economic Growth ?
Are we in a period of
Economic Decline ?

7. Types of Fiscal Policy IF Contractionary Policy DEFINITION:
Economic Growth
DEFINITION:
A decrease in government spending and/or an increase in taxes designed to lower aggregate (overall) demand in the economy, thus cutting inflation (stabilizing prices)

8. FIGHT INFLATION (rising prices)
Types of Fiscal Policy IF
Contractionary Policy
Economic Growth
OPTIONS:
1) Reduce Government Spending
So, why may you want a Contractionary Policy?
Government buys fewer goods/services (less demand)
Businesses may cut production, slowing growth rate
Decreased demand will lower prices (FIGHT INFLATION)
2) Increase Taxes
FIGHT INFLATION (rising prices)
Individuals have less money to spend (less demand)
Businesses may cut production, slowing growth rate
Decreased demand will lower prices (FIGHT INFLATION)

9. Types of Fiscal Policy IF Expansionary Policy DEFINITION:
Economic Decline
DEFINITION:
An increase in government spending and/or a decrease in taxes designed to increase aggregate (overall) demand in the economy, thus increasing real output and decreasing unemployment

10. Stimulate Growth & Employment
Types of Fiscal Policy IF
Expansionary Policy
Economic Decline
OPTIONS:
1) Increase Government Spending
So, why may you want an Expansionary Policy?
Government buys goods/services (increasing demand for goods)
Govt spending on social programs gives people money to spend
Businesses will increase production, raising employment
2) Decrease Taxes
Stimulate Growth & Employment
Individuals have more money to spend (increasing demand)
With higher demand businesses produce, raising employment
With lower taxes, businesses keep more profit, investing and growing

11. Approaches to Fiscal Policy
Classical Economics
Keynesian Economics
Supply-Side Economics

12. Classical Economics Developed by Adam Smith (1776) DEFINITION:
Theory Developed by Adam Smith advocating laissez-faire ideas, such as, minimum government intervention, free enterprise, and free trade

13. Classical Economics Developed by Adam Smith (1776)
Belief that the economy is “self correcting”
Gov’t should not attempt to “help” the economy
Do not charge taxes (minimal)
Do not incorporate much government spending
“Laissez-Faire” - Hands off !
Before 1930s, US government followed a Classical economic policy
What changed this?

14. Keynesian Economics Developed by John Maynard Keynes (1930s)
“Demand Side Economics”
Developed by John Maynard Keynes (1930s)
DEFINITION:
The macroeconomic theory holding that business cycles are caused by changes in aggregate (overall) demand and that such cycles can and should be influenced by fiscal and monetary policy undertaken to promote economic stability.

15. Keynesian Economics Developed by John Maynard Keynes (1930s)
“Demand Side Economics”
Developed by John Maynard Keynes (1930s)
Government can help struggling economies by spending money (in the short term)
This would create more demand for goods
Businesses would increase production AND…
Employment would increase
First used in US by President FDR to fight Depression in 1930s

16. Keynesian Economics Developed by John Maynard Keynes (1930s)
“Demand Side Economics”
Developed by John Maynard Keynes (1930s)
Proponents say:
When the economy is struggling, people/businesses need a kick start to get them buying, and the government can provide that by putting money into the economy (social programs, buying goods, etc.)
Opponents say:
That is okay in the short term, but once a government program is started to help people, it never gets taken away, which leads to bigger issues for the economy.

17. Supply-Side Economics
Developed by Milton Friedman (1980s)
DEFINITION:
Policy intended to increase an economy’s productive capacity by shifting aggregate supply: e.g, a tax cut giving businesses an incentive to invest and expand.

18. Supply-Side Economics
Developed by Milton Friedman (1980s)
He opposed Keynesian economics
He argued
Govt needs to focus on cutting their budgets
Govt needs to focus on cutting taxes
Economic growth set by willingness of producers to produce
Willingness to produce comes from making more money
More money comes from lower taxes
Ronald Reagan used in 80s to fight 70s recession

19. Supply-Side Economics Laffer Curve
Govt Revenue will increase
UNTIL
People are taxed too much
as taxes increase…
You can only tax people/business so much before they stop working or trying to produce !

20. Supply-Side Economics
Developed by Milton Friedman (1980s)
He opposed Keynesian economics
Proponents say:
Reducing taxes gives businesses/people more money to spend increasing demand for goods which will provide jobs and a growing economy
Opponents say:
Reducing taxes will cut government revenues which will lead to deficits or cuts in services for people. Additionally, tax cuts may only help those who make the most money.

21. The National Debt
So, what if you continue to increase government spending and can not afford to continue to raise taxes?!?
For decades the national government’s yearly budget spends more money than it brings in revenue
How does the government make up the difference?
BORROWING !!
sells Treasury Bills (matures in 26 weeks or less)
sells Treasury Notes (matures from 2 to 10 years)
sells Treasury Bonds (matures in 30 years)
Current National Debt

22. The National Debt – for yr 2014
Where the money comes from:
Individual Income Tax: $1.39 trillion
Corporate Income Tax: $320 billion
Corporate Payroll Tax: $1.02 trillion
Social Security, Medicare, etc.
Excise Taxes: $93 billion
Taxes on specific goods…gas, tobacco, etc.
Other Taxes: $189 billion
Tariffs, estate and gift taxes, etc.
Total Revenue
$3.02
trillion
Where the money goes:
Defense: $603 billion
Social Security: $850 billion
Medicare/aid: $511 billion
Interest on debt: $228 billion
Federal Pensions: $150 billion
Total Spending
$3.51
trillion
Income Security: $514 billion
Unemployment, Welfare, etc
Other: $658 billion
“Servicing the Debt” : Paying the interest on the debt
Deficit
$484
billion
Data generated from Office of Management and Budget (

23. The Debt Ceiling
By law, the Federal Government can only borrow so much money each year (as approved by Congress). Once it reaches that limit it can no longer borrow money.
If it cannot borrow money needed to cover the budget, then spending will have to be cut immediately.
That may mean people do not get paid, programs have to be cut and/or those that loaned us money will not get paid.
Show video: “Debt Ceiling, Explained”

24. The Debt Ceiling The debt ceiling has been raised 15 times since 2000.
What does this mean for our economy?
Show video: Debt Limit