Transcript The Tools of Fiscal Policy

The Tools of Fiscal Policy
When is the Fiscal Year?
• October 1 to September 30.
• FY2009 will begin this coming Oct. 1.
Budget Process
• Federal agencies send their money
request to the Office of Management and
Budget (OMB).
• The OMB reviews agency requests and
melds them into the President’s budget. In
January or February, the President sends
his budget to Congress.
Budget Process
• Congress reviews budget, enacts several
appropriations measures.
– The President signs funding measures.
• The President vetoes measures.
– Congress can override if they have 2/3 votes.
– If not enough votes, renegotiate.
3 Types of Federal Budgets
(a comparison of revenue and spending)
1. Balanced Budget
 Revenue and
Spending are equal
2. Surplus Budget
 Revenue is greater
than Spending
3. Deficit Budget
 Revenue is less
than Spending
• Budget Explorer: The Complete US
Federal Budget
• Budget of the United States Government:
Browse Fiscal Year 2008
• U.S. National Debt
Fiscal Policy
• Conducted by the Government
– Congress & the President
• (Monetary Policy is conducted by the ___.)
– FED
Fiscal Policy Toolbox
• What tools does the government
have to regulate the economy?
• Tax policies
• Spending programs
• Who implements fiscal policy?
• President/Congress
2 main tools of fiscal policy are…
• TAXES
– Tax rates
• Income, corporate, excise, FICA
– Tax incentives
• GOV’T SPENDING
– Public goods, defense, social programs, etc.
2 Types of Policy
• Loose (expansionary)
– Put more money in circulation (increase output.)
– (FED would lower DR, lower RR, buy securities)
– What can government do?
• Tight (contractionary)
– Pull money out of circulation (decrease output)
– (FED would raise DR, raise RR, sell securities)
– What can government do?
Fiscal Policy and the
Federal Budget
II. Fiscal Policy to get us out of a recession…
a. Decrease taxes
b. Increase government spending
c. Moves the budget towards a
deficit budget
III. Fiscal Policy and Inflation
a. Increase Taxes
b. Reduce Government Spending
c. This will move the federal budget towards
a surplus budget
John Keynes
• Economist with a very different view from
Adam Smith.
• What did Adam Smith believe?
– Laissez Faire- Govt not involved
• Keynes said that the government
SHOULD get involved in the economy
(to a limited extent.)
• Father of Fiscal Policy= John Maynard
Keynes
Keynesian Theory
• TAXES- The amount
of money individuals
and businesses have
to pay to the govt.
– During a slowdown of
the economy
• LOWER taxes
– During an inflationary
period
• RAISE taxes
Demand-Side Fiscal Policy
• Cut taxes & increase Govt spending during a
recession=
– Expansionary Fiscal Policy
• Increase taxes & decrease spending to fight
Inflation=
– Contractionary Fiscal Policy
Keynesian Theory
• TAX INCENTIVES (CREDITS)
• Given to businesses and individuals to get
them to do something the government
wants them to do. (buy fuel-efficient cars, hire people
coming off of welfare.)
– During a slowdown of the economy
• INCREASE tax incentives
– During an inflationary period
• DECREASE tax incentives.
Keynesian Theory
• GOVERNMENT SPENDING
• Buying all the things that government
provides, from highways, to military, to
education.
– During a slowdown of the economy
• INCREASE spending.
– During an inflationary period
• DECREASE spending.
Application
• The government cuts business and personal
income taxes and increases its own spending.
– What type of policy are they pursuing?
• Expansionary Fiscal Policy
• The government reduces the wages of its
employees while raising taxes on consumers
and businesses.
– What type of policy are they pursuing?
• Contractionary Fiscal Policy
AUTOMATIC STABILIZERS
• Public transfer payments
– Money being transferred from workers paying
taxes, to non-workers.
• Unemployment benefits
• Welfare, food stamps, Medicaid
• Social security, Medicare
– Mandatory (automatic) items for budget.
• Income taxes
– Personal income taxes
– Corporate income taxes