Eco 372 - Fiscal Policy Paper

Fiscal Policy

Learning Team

Cheryl Porter, Ericka Fong, Jennifer Beynon, Marcea Mickens

ECO/372

December 7, 2015

Bobbie Murray

Fiscal Policy

        Fiscal policy is when the government uses revenue collection policies such as taxes, and spending policies to influence the economy. The “American Recovery and Reinvestment Tax Act (ARRA): a combination of tax cuts, transfers to individuals and states, and government purchases estimated to increase budget deficits by a cumulative amount equal to 5.5 percent of one year’s GDP” (Auerbach, Gale, & Harris, 2010) is just one example of fiscal policy being used to stimulate the economy. In the same time frame the government also passed a fiscal policy, which encouraged consumers to purchase a new home by offering them an $8000.00 tax credit. This policy in particular helped multiple areas of the economy including real estate, financial institutions, title companies, and even tax firms. Fiscal policies affect government spending, the U.S. Economy, financial organizations such as Wells Fargo, macroeconomics, how strong the economy is, and how the financial organization Wells Fargo competes in the economy.

Federal Government Spending

The last five years have brought no real change to income tax rates. Especially with the introduction of the American Taxpayer Relief Act of 2012 (ATRA), which came into effect on January 2, 2013. The ATRA permanently extended the 2001 and 2003 Federal income tax cuts for 98% of taxpayers (ERP, 2013). This action was part of an attempt to help bolster the economy. When individuals pay less in taxes, they have more money to spend. When consumers support businesses, the economy improves. Though there have been no increases on income tax, during the same time period, there has been an overall increase in the total government spending. In 2010 total government spending was $5,274.2 billion which increased to $5,463.4 billion in 2014. While total spending has increased, when expressed as a percentage of the GDP, it has decreased from 35.6% in 2010 to 31.7% in 2014. Total government spending historically has increased at an annual rate of about 19%. That increased to 25% in 2008 when fiscal policy included bailouts for banks and some large companies in order to help stabilize the economy through stimulus bills. But, the annual increase in spending has since declined to about 20% (OMB, 2015).

Fiscal Policies Impact on U.S. Economy

It can be difficult to say what impact certain fiscal policies have on the economy. The problem is that it is unknown what the exact path of the economy would have been if these policies had not been enacted. Because that path cannot be observed, the new data only adds limited information about policy impacts. But, from the data that is available, it can be said that these economic policies did improve the economy some. The economy is still recovering from the 2008 recession. The economic policies put into place in the last 3-5 years have been slower to effect that recovery than the policies that were enacted earlier in the recovery period. Though the improvement is small and still slow, there has been improvement, which is promising (CBO, 2015).