Pros And Cons Of Fiscal Policy
What is the Fiscal policy?
Fiscal policy is the use of government spending and taxation to influence the economy. When the government decides on the goods and services it purchases, the transfer payments it distributes, or the taxes it collects, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is experienced by particular groups—a tax cut for families with children, for example, raises their disposable income (Weil, n.d.).
Discussions of fiscal policy, however, generally focus on the effect of changes in the government budget on the overall economy. Although any changes in taxes or spending that are “revenue neutral” may be interpreted as fiscal policy and may affect the aggregate level of …show more content…
In the longer term, the drivers can be development levels, demographics, or natural resource endowments. The desire to reduce poverty might lead a low-income country to tilt spending toward primary health care, whereas in an advanced economy, pension reforms might target looming long-term costs related to an aging population (Horton & El-Ganainy, 2012).
The Pros & Cons of Fiscal Policy
Pros:
• Can direct spending to specific purposes: Unlike monetary policy tools which are general in nature, a government can direct spending towards specific projects, sectors, or regions to stimulate the economy where it is recognized perceived to be demanded the most (Hayes, n.d.).
• Can use taxation to discourage negative externalities: Taxing polluters or those that overuse limited resources can help remove the negative effects they cause while generating government revenue (Hayes, n.d.).
• Short time lag: The effects of fiscal policy tools can be reviewed much quicker than the effects of monetary tools. (Hayes, n.d.).
Cons:
• Can create budget deficits: A government budget deficit is when it spends more money annually than it takes in. If spending is high and taxes are low for too long, such a deficit can continue to widen to dangerous levels (Hayes, …show more content…
Policy uncertainty, high levels of public debt, and high inflation, can deter private investment (FISCAL POLICY AND LONG-TERM GROWTH, 2015).
• Careful consideration needs to be granted to the pace of fiscal consolidation. Countries that are not under market pressure should proceed with gradual fiscal consolidation, anchored in a credible medium-term plan (Fiscal, 2015).
• Appropriately designed fiscal reform packages can serve both growth and equity objectives: for example, if revenue from relatively regressive tax reforms is used to finance higher health and education spending, the overall result can be higher growth and lower inequality (Fiscal, 2015).
• Specific tax and expenditure policies can help growth (Fiscal, 2015). Policies to increase the labor supply in many advanced economies, significant distortions arise from the tax-benefit system:
• Lowering the labor tax wedge increases after-tax earnings and the supply of labor, particularly for younger workers, women and the low-skilled(Fiscal, 2015);
Introducing targeted measures can encourage the labor force participation (LFP) of particular
Fiscal policy is the use of government spending and taxation to influence the economy. When the government decides on the goods and services it purchases, the transfer payments it distributes, or the taxes it collects, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is experienced by particular groups—a tax cut for families with children, for example, raises their disposable income (Weil, n.d.).
Discussions of fiscal policy, however, generally focus on the effect of changes in the government budget on the overall economy. Although any changes in taxes or spending that are “revenue neutral” may be interpreted as fiscal policy and may affect the aggregate level of …show more content…
In the longer term, the drivers can be development levels, demographics, or natural resource endowments. The desire to reduce poverty might lead a low-income country to tilt spending toward primary health care, whereas in an advanced economy, pension reforms might target looming long-term costs related to an aging population (Horton & El-Ganainy, 2012).
The Pros & Cons of Fiscal Policy
Pros:
• Can direct spending to specific purposes: Unlike monetary policy tools which are general in nature, a government can direct spending towards specific projects, sectors, or regions to stimulate the economy where it is recognized perceived to be demanded the most (Hayes, n.d.).
• Can use taxation to discourage negative externalities: Taxing polluters or those that overuse limited resources can help remove the negative effects they cause while generating government revenue (Hayes, n.d.).
• Short time lag: The effects of fiscal policy tools can be reviewed much quicker than the effects of monetary tools. (Hayes, n.d.).
Cons:
• Can create budget deficits: A government budget deficit is when it spends more money annually than it takes in. If spending is high and taxes are low for too long, such a deficit can continue to widen to dangerous levels (Hayes, …show more content…
Policy uncertainty, high levels of public debt, and high inflation, can deter private investment (FISCAL POLICY AND LONG-TERM GROWTH, 2015).
• Careful consideration needs to be granted to the pace of fiscal consolidation. Countries that are not under market pressure should proceed with gradual fiscal consolidation, anchored in a credible medium-term plan (Fiscal, 2015).
• Appropriately designed fiscal reform packages can serve both growth and equity objectives: for example, if revenue from relatively regressive tax reforms is used to finance higher health and education spending, the overall result can be higher growth and lower inequality (Fiscal, 2015).
• Specific tax and expenditure policies can help growth (Fiscal, 2015). Policies to increase the labor supply in many advanced economies, significant distortions arise from the tax-benefit system:
• Lowering the labor tax wedge increases after-tax earnings and the supply of labor, particularly for younger workers, women and the low-skilled(Fiscal, 2015);
Introducing targeted measures can encourage the labor force participation (LFP) of particular