fiscal policy
1- Definition of Fiscal Policy:
Fiscal policy refers to the use of government spending and taxation to
influence the overall state of the economy. It involves the government's
decisions regarding how it collects revenue (taxes) and how it spends that
revenue to achieve desired economic outcomes.
2- fiscal policy in Economic Theories:
A- In classical model:
Classical thought is based on economic freedom, non-interference of the
state in economic activity, and that the role of the state is limited to
traditional jobs only, and thus the role of fiscal policy is limited to
providing the public revenues needed to achieve these jobs only.
B- In Keynesian model:
Keynes believes that the state should intervene in economic activity to
achieve full employment and achieve economic stability.
3-Target:
Economic Stability:
This involves managing aggregate demand in the economy to control
inflation, reduce unemployment.
Economic Growth:
By allocating resources towards infrastructure development, education
and skills training, research and development.
Income Redistribution and Social Welfare:
Governments may use tax and spending policies to reduce income
inequalities, provide social safety nets, and ensure the well-being of
vulnerable groups.
4- Tools:
Government Spending
• By increasing or decreasing government spending on various
sectors, fiscal policy can directly impact aggregate demand and
economic activity.
Taxation: •
• Governments can adjust tax rates, and deductions to influence
the level of disposable income and overall aggregate demand in
the economy.
• Kinds of tax:
Income Tax:
This tax is levied on the income earned by individuals,
corporations, and other entities. It is usually based on a percentage
of the income earned and can be progressive (higher earners pay a
higher percentage) or flat (a fixed percentage applied to all income
levels).
Sales Tax:
Also known as Value Added Tax (VAT) or Goods and Services
Tax (GST), this tax is applied to the sale of goods and services. It
is typically a percentage of the purchase price and is collected by
the seller at the point of sale.
Property Tax:
• This tax is based on the value of real estate properties, including
land, buildings, and other structures. Property taxes are usually
levied by local governments and are used to fund public services
such as schools, infrastructure, and emergency services.
Capital Gains Tax:
This tax is imposed on the profits earned from the sale of certain
assets, such as stocks, bonds, real estate, or other investments. The
tax is based on the difference between the purchase price and the
selling price of the asset.
Estate Tax:
• Also known as inheritance tax or death tax, this tax is imposed on
the transfer of wealth from a deceased person to their heirs. It is
based on the value of the assets transferred and is typically
progressive, with higher rates applied to larger estates.
Excise Tax:
• This tax is levied on specific goods or services, such as tobacco,
alcohol, gasoline, or luxury items. Excise taxes are often used to
discourage the consumption of certain products or to fund specific
government programs.
Payroll Tax:
• This tax is withheld from employees' wages by employers to fund
social insurance programs such as Social Security and Medicare.
Both the employer and the employee contribute to payroll taxes.
Customs Duties:
These taxes are imposed on goods imported into a country.
Customs duties are typically based on the value or quantity of the
imported goods and are designed to protect domestic industries and
generate revenue.
5- How could the government reduce the public budget
deficit?
Increase tax revenue:
• The government can raise taxes or eliminate tax loopholes to
generate additional revenue. This could involve increasing income
tax rates, corporate taxes, or introducing new taxes on certain
goods or services.
Stimulate economic growth:
By promoting economic growth, governments can increase tax revenues
and reduce the budget deficit. This can be achieved through policies that
encourage investment, innovation, and entrepreneurship, as well as
measures to boost consumer spending and improve business conditions.
Reduce government spending:
• Governments can implement measures to control and reduce
spending. This can involve cutting or reducing funding for certain
programs, eliminating wasteful spending, and improving efficiency
in public services.
Control public debt:
Governments can implement strategies to manage and reduce public debt,
as high levels of debt can contribute to budget deficits. This can involve
refinancing existing debt at lower interest rates, implementing debt
consolidation measures, and adopting fiscal policies that prioritize debt
reduction over time.
Improve budgeting and financial management:
Governments can enhance budgeting and financial management practices
to ensure more efficient allocation of resources. This can involve better
forecasting, monitoring and evaluation of government spending, as well
as implementing measures to combat corruption and improve
accountability.
Implement structural reforms:
• Governments can pursue structural reforms in areas such as
healthcare, pension systems, and public sector efficiency. These
reforms aim to improve the sustainability of public finances in the
long term and reduce the need for deficit spending.
