Fiscal Policy

Fiscal Policy

The fiscal policy is "the use of government spending and taxation to influence the economy" (econlib). The government engages in fiscal policy when it is choosing which goods and/or services to use, collecting taxes, and transferring payments it distributes. The policy was created in order to beat back recession and was first used in the 1930s. Its creator, John Keynes, came up with the idea in order to help the country recover during the Great Depression. Fiscal policy has three major areas that it can impact when changing the level and content of government spending and taxation. The three components are: aggregate demand and the level of economic activity, the pattern of resource allocation, and distribution of income. The fiscal policy also "refers to the overall effect of the budget outcome on economic activity" (econlib). There are three different kinds of fiscal policy: neutral, expansionary, and contractionary. Each one deals with a different balance of government spending and tax revenue. Lastly, the fiscal policy also has an opposing policy that relates to the same topic in a different focus. The monetary policy attempts to stabilize the economy by manipulating interest rates and the money supply. When comparing both policies, each has their strengths and weaknesses. The overall objective of the fiscal policy is to have price stability, full employment, and economic growth.

The government spends money each and every day on a wide range of goods and services. It funds everything from the armed forces to education, as well as transfer of payments such as welfare benefits. In order to pay for all of this, the government has acquired different sources of income. Some of the more popular sources are: taxation, seigniorage (the advantage of printing money), borrowing money from the population (which results in a fiscal deficit), consumption of fiscal reserves, and sale of fixed assets. Taxation consists of every day taxes people pay such as federal taxes. Each time you receive a pay check, a portion of the money you earned goes to the Fed. Seigniorage is the revenue derived from issuing currency. It is the difference between the value of money and the cost to produce it. Say it costs .05 cents to create one dollar bill. The seigniorage is .95 cents, the difference between the two amounts. The most common way the government borrows money is through bonds, treasure bills, and other government issued securities. Government issued bonds are essentially forms of debt. Though the government is raising funds, it is increasing the fiscal deficit because each bond pays interest. Fiscal reserves consist of money that has been saved by the government which is used to pay off debt. Lastly, the government can raise funds by selling fixed assets. These assets can consist of anything owned by the government ranging from land to weapon technology.

Fiscal policy