) suggest two types of fiscal policy that can

) Fiscal policy refers to changes in government
expenditures and / or taxes to achieve economic goals, such as low
unemployment, price stability, and economic growth. It is
the use of government revenue collection (mainly taxes)
and expenditure (spending) to influence the economy. According
to Keynesian economics, when the government changes the levels of taxation
and government spending, it influences aggregate demand and the level
of economic activity. Fiscal policy is often used to stabilize the economy over
the course of the business cycle. Thus, I would like to suggest two types
of fiscal policy that can be implemented to have a sustainable GDP growth which
are automatic fiscal stabilisers and discretionary fiscal policy. Automatic
fiscal stabilisers are economic policies and programs designed to offset
fluctuations in a nation’s economic activity without intervention by the
government or policymakers on an individual basis. The best-known automatic
stabilizers are corporate and personal taxes, and transfer systems such
as unemployment
insurance and welfare. Automatic stabilizers
are so called because they act to stabilize economic cycles and are automatically triggered without explicit
government action. For instance, progressive income taxes, this is the type of
tax that increases when income of a person increases.
Progressive taxation push people into higher income tax brackets during boom
times, substantially increasing their tax bill and reducing government budget
deficits (or increasing government surpluses). During recessions, many
individuals fall into lower tax brackets or have no income tax liability. This
increases the size of the government budget deficit (or reduces the surplus).
Whereas for discretionary fiscal policy, it is the non mandatory changes in
government expenditures and taxes that need specific approval from the Congress
or the President in response to economic events or changes in economic
conditions. Discretionary fiscal policy often occurs in period of recession or
economic turbulence. For example, increases in spending on roads, bridges,
stadiums, and other public works in an attempt to lower the unemployment rate.

On the contrary, the national income will increase
if the government is running a budget deficit. This is because GDP will rise if
aggregate expenditure exceeds GDP. Government Budget is a detail accounting for the income received by
the government such as people who pay the taxes and fees and the payments
government made such as purchases and transfer payments. A budget deficit
occurs when the government spends more than what they receive.A
budget deficit means that government expenditure which is an injection is
greater than taxation which is a withdrawal. Besides that, budget surplus is the opposite of the budget
deficit which is taxation greater than government expenditure.When the government
running a budget deficit and the government expenditure
increases, it will directly proportional influence the national income since
government expenditure is one of the determinants for equilibrium level of
national income. This occurs based on the formula, national income = total
expenditure ( consumption + investment + government expenditure)

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

It is difficult
to fine tune the economy by using fiscal policy because there are a few
obstacles that are against it. One of the
obstacles is time lag because if the scheme of the government is increasing the
spending and this may take a long time process to filter into the economy or
may be too late. Spending plans are only setting once a year, so there will
certainly be a delay in implementing any changes in government plans.After that
,fiscal policy decision needs approval by the government and this will require
a longer time to approval.So, that is why decisions are not taken at proper
time and this will cause time lag. Besides,the multiplier effect also is an obstacle to
fiscal policy because fiscal policy is depending on multiplier effect.The
fiscal multiplier effects occur when an initial injection into an economy and
cause a larger final increase in national income. So, increase the multiplier
effect may have any changes in injections and the size of the multiplier will
become larger.If the income increase,the multiplier effect will be low and the
effectiveness of fiscal policy will also be reduced.In expansionary policy, the
extent to which government spending and tax cuts increase aggregate demand
depends on spending and tax multipliers.The spending multiplier is bigger than
the tax multiplier because the entire increase in government spending is
achieved by increasing aggregate demand, but only a portion of the increase in
disposable income (due to the lower taxes) is consumed.So,the multiplier effect
of a tax cut can be affected by the size of the tax cut, the marginal
propensity to consume.

Fiscal policy will suffer if the
government has poor information.Poor information gives rise to poor decision
and a decisions cannot be better than the information on which they are based
.Poor information also can have very serious consequences such as affect the
economic growth For example, if the government assumed there is going to be an
inflation next year and they will decrease the aggregate demand.However, if
this prediction was wrong and the economy grew slowly, the government action
would cause the recession.Furthermore, the fourth obstacle is
side effects on public spending. If the
government decide to reduce government spending (G) to decrease inflationary
pressure, the government spending can harm long -term productivity. The
government spending involves investment in increasing capital stock and productive
capacity, such as building new roads, public transport and education and this
cause market failure and social inefficiency. Then, lower the government also
will lead to lower the economic growth. Also, it will be difficult to reduce
spending in the future. If the government chooses to reduce government spending
(G) to decrease inflationary pressure, it could adversely affect public
services such as public transport and education causing market failure and
social inefficiency. The last obstacle is crowding out. Crowding out occurs
when expansionary fiscal policy of increased government spending (G) and will
not increase the aggregate demand or increase slowly .For example, if the
government spending increase , because they borrow money from the private
sector, so private sector will reduces private sector investment and spending.
However, private saving rates rise quickly during the recession. Thus, an
expansionary fiscal policy helps to counteract the rises of private sector
saving and put money into the circular flow so will not cause any crowding out.

x

Hi!
I'm Jamie!

Would you like to get a custom essay? How about receiving a customized one?

Check it out