I.
Introduction to Fiscal Policy
a. Definition
The role of government in the economic is to extend far
beyond its activities as a regulator of specific industries. The government
also manages the overall pace of economic activity, yet because of some effected
of the government budget deficit, public debt in the countries can lead the
government to requiring taxes collection to maintain or to make as much as high
levels of employment, stable prices and economic growth. Fiscal policy is the
government tool used in the economies to manipulate the market by taxation and
also expenditure.
b. Types
of Fiscal Policy
There are two main tools in the fiscal
policy, through which it determines the appropriate level of the expansionary and
contractionary fiscal policy. Expansionary and contractionary fiscal policy, these
two main types play an important role in the economies, expansionary fiscal
policy happened when the government increase in spending but lower the taxes
collection. It will lead the government to borrowing from the banking sectors
and also the government would issuing bond to get revenue in the ways that also
can lead government economies to have a risk of the inflation. Contractionary
is the second main types of the Fiscal policy that indicate the spending of
government are less than taxation and will run a budget surplus in the
economies. Behind of these concerns, the government will pay down the debt and
leaves the bond, which had issued, by point out to get some fund to make any
investment to influence in the economies (Dodge, 2011) .
II.
The Importance of Fiscal Policy
Fiscal policy is
important when there is a recession or inflation in the economy. It is used as
a tool by the government to stabilize the economic activities. Most governments
around the world always want to stabilize their economy by maintaining a sound
price level, employment rate and moderate economic growth.
If any of these areas
is distorted, one of the two types of fiscal policy can be taken into action in
order to mitigate the situation. Fiscal policy can be used to either stimulate
growth in one economy or vice versa. The changing of government spending and
tax will directly affect aggregate demand and aggregate supply. It is the most
useful tool for government to manipulate the economy when the tools of monetary
policy loss its effectiveness. For example, during
the economic down turn in 2008 and 2009, the Federal Reserve cut its target interest rate to almost zero in which the
monetary policay is no longer useful. Hence, the only availble and powerful
tool for the U.S government during that time to increase aggregate demand is expansionary
fiscal policy (Mankiw, 2011) .
III.
The Roles of Fiscal Policy in the
Economy
The role of fiscal
policy is to stimulate growth and stabilize the economy of a nation or region
through an increase or decrease in government spending and taxation. Fiscal
policy is an alternative tool to monetary policy and it is widely used by many
governments around the globe to intervene a destabilize economy.
When an economy is
sluggish, the governments can use an expansionary fiscal policy to increase
economic activities. With expansionary fiscal policy, citizens will have more
money in hand and also get higher disposable income as the government increases
spending and reducing tax. Hence, the consumption and investment will increase
which in turn the government can collect more tax from sales for both local and
national level. On the other hand, when the economy grows too fast out of
control or faces hyperinflation, the governments can slow it down by using a contractionary
fiscal policy. A reduction in government spending will directly decrease the
aggregate demand curve by reducing government demand for goods and services,
whereas the increase in taxation will slow down growth and reduce consumers’
demand and investment which indirectly reduce aggregate demand (Forsythe, 2012) . In addition, fiscal
policy has role can one economy both in short-term and long term. The long-term
goal of fiscal policy is to reduce poverty and ensure sustainable growth in one
nation; while in short term, it plans to redeem a sluggish economy (Cartmell, 2013) .
IV.
The Effects of Fiscal Policy
Fiscal policy is one of the major
policies that use by government to control the stability of the economy as
whole by focus on taxation and government expenditure. But how does it effect
on public finance management? Public finance is all about how the government
makes control over the economy to make it stabilize, basically it talks about
what is the role of the government in the economy. Fiscal policy has a big
impact on public finance management by changing the aggregate demand or supply
of the market to certain level. How does it do that? In case of government
expenditure, if, for instance, the government orders cars from Crysler for 10
million dollars, hence, it will create more jobs and more income to many
households and shift the aggregate demand and supply. When this 10 million
inject to the circulation, it’s not only increase by 10 million, but instead
there is multiplier affect where this money could create 50 or 60 million more,
for example. On the other hand, changing tax system also effect market system
as whole. Take for grant, if the government decrease income tax on workers,
thus workers will bring more money to their home, which they have more money in
hands. As a consequence, they will enjoy spending to buy consumer goods more.
V.
Conclusion
All in all, fiscal policy is one of the government tools
used to intervene and manipulate economy either to increase the economic
performance or slow down the growth. By changing spending and taxing level,
government can directly or indirectly affect aggregate demand in the economy. Despite
fiscal policy is a powerful tools for organizing economy, it is not 100 percent
effective. Consider the time of recession, fiscal policy may face some problems
due to time lag before the new policy is recognized. Likewise, it will take
time to put the policy into action base on the approval in legislative and
administrative process. Lastly, there is another difficulty for the same policy
to show result after implementation (Forsythe, 2012) . Moreover, if the
consumer positively respond to the policy, the policy and economy will work well.
In contrast, most consumers have negative respond when the government increases
spending that will likely to incur tax burden in the future. Consequently, consumers
are willing to save more rather than spending in order to anticipate higher tax
in the future, and it will lead to decrease in aggregate demand.
VI.
References
Cartmell, P. (2013, November 10). What Is the Role of
Fiscal Policy? (E. E. Hubbard, Editor, & Conjecture Corporation)
Retrieved November 10, 2013, from wise GEEK:
http://www.wisegeek.com/what-is-the-role-of-fiscal-policy.htm
Dodge, E. R. (2011, March 4). Expansionary
and Contractionary Fiscal Policy Review for AP Economics. (McGraw-Hill,
Producer) Retrieved November 20, 2013, from Education :
http://www.education.com/study-help/article/expansionary-contractionary-fiscal-policy/
Forsythe, A. (2012). Fiscal
Policy. Retrieved November 10, 2013, from Economic Foundamental Finance:
http://economics.fundamentalfinance.com/fiscal-policy.php
Mankiw, N. G. (2011). Principles
of Macroeconomics (6th ed.). CENGAGE Learning.
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