16. fiscal policy

Fiscal Policy

Or, the decisions made

Hereand

Here

What is it?Policy carried out by the government with the purpose of stabilizing the economy. This comes to us from this guy

Jim Flarherty Federal Minister of Finance

and

Charles Sousa Minister of Finance for Ontario

Tools of fiscal policy:

Taxation -

(For the federal gov’t this is mostly income,

corporate and GST/HST)

(A leakage from the income flow

cycle.)

and

Government Spending -

(i.e. social services, infrastructure, employment.)

(An injection into the income

flow cycle.)

These tools can be used as two types of stabilizers:1. Discretionary Stabilizers:- a deliberate action taken by the gov’t with the intent of

influencing the economy up or

down.- e.g. -

infrastructure (public works) spending or a tax reduction

2. Automatic Stabilizers:

- gov’t programs which are permanently in

place that will automatically have a

stabilizing effect on the economy.

- e.g. Social service spending- as unemployment rises

more money is automatically spent on employment

insurance.

One more set of terms to apply to Fiscal Policy:

Expansionary policy:

- this would tend to be used when the gov’t is trying to expand the economy.

- the effect would generally be one of

budget deficit - spending more than

taking in.

- when the economy is in a

recessionary state.

Contractionary policy:

- this would tend to be used when the gov’t is trying to contract the economy.

- the effect would generally be one of budget surplus -

keeping some of the money coming in.

- when the economy is peaking.

The case of a Recession

what are the macro-economic signs?

•Aggregate Demand (AD) and GDP down

•employment levels (LFS) down

•price levels (CPI)down

Therefore - fiscal policy in a recession:

A. Discretionary stabilizers:

B. Automatic stabilizers:

i) increased spending on public works projects(this would cause employment and reduce welfare and EI payments)

ii) reduce taxes(leave more money in the hands of consumers and businesses to increase spending and investment.)

i) EI premiums down while payments of EI are upii) welfare payments up

iii) all types of tax receipts fall(budget deficit almost an automatic result - may lead to increase in debt.)

The case of a Booming economy

what are the macro-economic signs?

•Aggregate Demand (AD) and GDP high

•employment levels (LFS) high

•price levels (CPI) up (inflation)

Therefore - fiscal policy in a peak:

A. Discretionary stabilizers:

B. Automatic stabilizers:

i) decreased spending - i.e. limit investment into businesses(although must be careful not to hurt economically

depressed areas)ii) increased taxes

(must be selective to deal with specific areas of concern.)

i) EI premiums take in more while less EI is distributed.ii) welfare payments

decreaseiii) all types of tax receipts increase

(tendency toward a budgetary surplus.)

BUT...•Anything the gov’t. does will cause a ripple effect throughout the economy on a delayed basis.Why delayed?

- research is required to determine the true state of the economy, the areas of need, and the action to be taken.- the democratic process - a very long, slow process that does not always look out for the good of the country as a whole.

Result:The problem may disappear or grow much larger while solutions are being worked out. This could cause the solutions to have a negative effect overall.