Fiscal Policy

Fiscal policy is the change in the expenditures or tax revenues of the federal government. Two tools of fiscal policy are Taxes & Spending.

• Deficits, Surpluses, & Debt
• Balanced budget ( Revenues = Expenditure)
• Deficit budget ( Revenues > Expenditures )
• Surplus budget ( Revenues < Expenditures )
• Government debt ( Sum of all deficits - sum of all surpluses)
• Government must borrow money when it runs a budget deficit, from
• Individuals
• Corporations
• Financial institutions
• Foreign entities or foreign countries

Fiscal policy option

• Discretionary fiscal policy (action)
• Expansionary fiscal policy (Think deficit) Designed to increase aggregate demand. Strategy for increasing GDP, combatting a recession, and unemployment. Recession countered with Increase government spending, & decrease taxes.
• Contractionary fiscal policy ( Think surplus) Designed to decrease aggregate demand. Strategy for controlling inflation, countered with increasing taxes, & decreasing government spending.
• Non-Discretionary fiscal policy (No action)

Discretionary vs Automatic fiscal policies

• Discretionary, increasing or decreasing government spending & lower taxes in order to return to economy to full employment. Involves policy makers doing fiscal policy in response to an economical problem.
• Automatic unemployment compensation & marginal tax rates are examples of automatic policies, that help mitigate the effects of recession as well as inflation. They take place without policy makers having to respond to current economic problems. Anything that increase the government budget deficit during a recession & increase its budget surplus during inflation without requiring explicit action by policy markers.

Non-Discretionary fiscal policy (Automatic stabilizer)

• Transfer payments
• Welfare checks 
• Food Stamps
• Unemployment checks
• Corporate dividend
• Social security 
• Veterans benefits
• Progressive income taxes

Progressive tax system

• Average tax rate (tax revenue / GDP ) rises with GDP
• Proportional tax system
• Average tax rate remains constant as GDP changes

Regressive tax system

• Average tax rate falls with GDP