discretionary fiscal policy

Examples of discretionary fiscal policy in the following topics:

• Difficulty in Getting the Timing Right

  • Discretionary fiscal policy relies on getting the timing right, but this can be difficult to determine at the time decisions must be made.
  • A nation can respond to economic fluctuations through automatic stabilizers or through discretionary policy.
  • With discretionary fiscal policy, timing plays a very significant role.
  • Discretionary policy often requires that a set of laws must be passed through a legislature.
  • Explain the effect of timing on the use of fiscal policy tools

• Automatic Stabilizers Versus Discretionary Policy

  • In fiscal policy, there are two different approaches to stabilizing the economy: automatic stabilizers and discretionary policy.
  • In practice, most policy changes are discretionary in nature.
  • With discretionary policy there is a significant time lag.
  • It is due to these significant lags that economists like Milton Friedman believed that discretionary fiscal policy could be destabilizing.
  • Discretionary policies can target other, specific areas of the economy.

• Effect of a Government Budget Deficit on Investment and Equilibrium

  • As the economy grows more quickly, the budget deficit falls and the fiscal stimulus is slowly removed.
  • Unlike the cyclical budget deficit, a structural deficit is the result of discretionary, not automatic, fiscal policy.
  • While automatic stabilizers don't actually shift the aggregate demand curve (because transfer payments and taxes are already built into aggregate demand), discretionary fiscal policy can shift the aggregate demand curve.

• Arguments For and Against Discretionary Monetary Policy

  • Discretionary policies refer to subjective actions taken in response to changes in the economy.
  • These typically used fiscal and monetary policy to adjust inflation, output, and unemployment.
  • This can create compounding issues related to the discretionary policy enacted.
  • A compromise between strict discretionary and strict rule-based policy is to grant discretionary power to an independent body.
  • The policies they enact cannot be destabilized by government fiscal policy.

• The Goals of Economic Policy

  • For much of the 20th century, governments adopted discretionary policies such as demand management that were designed to correct the business cycle.
  • These typically used fiscal and monetary policy to adjust inflation, output and unemployment.
  • A discretionary policy is supported because it allows policymakers to respond quickly to events.
  • A compromise between strict discretionary and strict rule-based policy is to grant discretionary power to an independent body.
  • Another type of non-discretionary policy is a set of policies which are imposed by an international body.

• Arguments For and Against Fighting Recession with Expansionary Fiscal Policy

  • Expansionary fiscal policies, which are usually implemented during recessions, attempt to increase economic demand.
  • Fiscal policy is a broad term, describing the policies enacted around government revenue and expenditure in order to influence the economy.
  • Expansionary fiscal policies involve reducing taxes or increasing government expenditure.
  • Increasing government spending, creating a budget deficit, and financing the shortfall through debt issuance are typical policy actions in an expansionary fiscal policy scenario.
  • Evaluate the pros and cons of fiscal policy intervention during recession

• The Budgeting Process

  • Congress which recommends funding levels for the next fiscal year, beginning October 1.
  • In the short-run, tax revenues have declined significantly due to a severe recession and tax policy choices, while expenditures have expanded for wars, unemployment insurance and other safety net spending.
  • Discretionary budget authority is established annually by Congress, as opposed to mandatory spending that is required by laws that span multiple years, such as Social Security or Medicare.
  • The annual budget deficit is the difference between actual cash collections and budgeted spending (a partial measure of total spending) during a given fiscal year, which runs from October 1 to September 30.
  • Describe the key components of the budget process and the current fiscal position of the United States

• Fiscal Policy and the Multiplier

  • Fiscal policy can have a multiplier effect on the economy.
  • The size of the multiplier effect depends upon the fiscal policy.
  • Expansionary fiscal policy can lead to an increase in real GDP that is larger than the initial rise in aggregate spending caused by the policy.
  • Conversely, contractionary fiscal policy can lead to a fall in real GDP that is larger than the initial reduction in aggregate spending caused by the policy .
  • Describe the effects of the multiplier beyond its relevance to fiscal policy

• Long-Run Implications of Fiscal Policy

  • Expansionary fiscal policy can lead to decreased private investment, decreased net imports, and increased inflation.
  • Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy.
  • That being said, these changes in fiscal policy can affect the following macroeconomic variables in an economy:
  • Economists still debate the effectiveness of fiscal policy to influence the economy, particularly when it comes to using expansionary fiscal policy to stimulate the economy.
  • If a country pursues and expansionary fiscal policy, high inflation becomes a concern.

• Fiscal Policy and Policy Making

  • Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy.
  • The two main instruments of fiscal policy are government taxation and expenditure.
  • Neutral fiscal policy, usually undertaken when an economy is in equilibrium.
  • Expansionary fiscal policy, which involves government spending exceeding tax revenue, and is usually undertaken during recessions.
  • Comparison of National Spending Per Citizen for the 20 Largest Economies is an example of various fiscal policies.