The Tools of Fiscal Policy

When is the Fiscal Year?

• October 1 to September 30.

• FY2014 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