Ch. 13: Fiscal Policy • Federal budget process and recent history of outlays, tax revenues, deficits, and debts • Supply-Side Economics • Controversies on effects of deficits on investment, saving, and economic growth • Fiscal policy as a stabilization tool
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Ch. 13: Fiscal Policy Federal budget process and recent history of outlays, tax revenues, deficits, and debts Supply-Side Economics Controversies on effects.
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Ch. 13: Fiscal Policy
• Federal budget process and recent history of outlays, tax revenues, deficits, and debts
• Supply-Side Economics• Controversies on effects of deficits on investment,
saving, and economic growth• Fiscal policy as a stabilization tool
The Federal Budget and Fiscal Policy
Federal budget• annual statement of the federal government’s outlays and tax
revenues.• Two purposes
o finance the activities of the federal governmento achieve macroeconomic objectives
Fiscal policy • the use of the federal budget to achieve macroeconomic
objectives• Employment Act of 1946
it is the continuing policy and responsibility of the Federal Government to use all practicable means . . . to coordinate and utilize all its plans, functions, and resources . . . to promote maximum employment, production, and purchasing power.
(Normal) Timeline for Budget Process
February to March President submits budget request to Congress.
May-August:House and Senate revise/amend proposals
September House-Senate conference committees resolve differences and agree on final versions of spending bills. President signs or vetoes final bills.
October 1 Beginning of fiscal year (10/1/2013 is beginning of 2014 fiscal year).
Congress passes continuing resolutions to maintain funding for any agencies affected by appropriations bills that have not been passed and signed by the beginning of the fiscal year.
Fiscal Policy
The Council of Economic Advisors• Chaired by Jason Furman• keeps the President and public informed about the
current state of the economy • evaluates economic proposals• Provides data to inform the budget-making process.
Congressional Budget Office• Forecasts effects of legislative changes on budget and
• The total government sector includes state and local governments as well as the federal government.
• In 2008, when federal government outlays were about $3,200 billion, state and local outlays were a further $2,000 billion.
• Most of state expenditures were on public schools, colleges, and universities ($550 billion); local police and fire services; and roads.
• Most states have “balanced budget amendments”.
State and Local Budgets
Supply-Side Economics
Fiscal policy aimed at increasing LAS• Income taxes affect LAS by affecting labor supply.• Higher income taxes reduce labor supply & reduce LAS• “Supply-siders” argue for low marginal tax rates.
Graph the effect of an increase in income tax rate on• before-tax real wage rate, after-tax real wage rate.• Tax-wedge (difference between before and after tax wage)• Equilibrium employment• LAS