Fiscal policy of the state. Fiscal policy Detailed plan on the topic of fiscal policy of the state

Are you here: Questions and answers

Lecture outline:

20.2 Government expenditures. Expansionary and contractionary fiscal policy.

20.3 Discretionary and automatic fiscal policy.

20.4 Fiscal policy and state budget. State budget deficit.

20.5 Public debt and methods of managing it.

Fiscal policy(fiscal policy) - a set of government measures to regulate government spending and taxes to achieve the level of full employment and further economic growth (therefore, fiscal policy is also called fiscal policy).

Fiscal policy, also called financial and fiscal policy, extends its effect to the main elements of the state treasury (fiscal). Fiscal policy combines such large types and forms of financial policy as budgetary, tax, income and expenditure policies. Fiscal policy extends to the mobilization, attraction of funds necessary for the state, their distribution, and ensuring the use of these funds for their intended purpose, Figure 20.1.

Figure 20.1 – Characteristics of fiscal policy

One of the most important tasks of fiscal policy consists in searching for sources and methods of forming centralized state monetary funds, funds that allow realizing the goals of economic policy.

Fiscal policy goals like any stabilization (countercyclical) policy aimed at smoothing out cyclical fluctuations in the economy, are to ensure:

1 Stable economic growth;

2 Full employment of resources (primarily solving the problem of cyclical unemployment);

3 Stable price levels (solving the problem of inflation).

Fiscal policy- This is the government’s policy of regulating, first of all, aggregate demand. Regulation of the economy in this case occurs by influencing the amount of total expenditures. However, some fiscal policy instruments can be used to influence aggregate supply through influencing the level of business activity. Fiscal policy is carried out by the government.

The instruments of fiscal policy are expenditures and revenues of the state budget, namely:

1 Government procurement;

3 Transfers.

Impact of fiscal policy instruments on aggregate demand

The impact of fiscal policy instruments on aggregate demand varies. From the aggregate demand formula: AD = C + I + G + Xn it follows that government purchases are a component of aggregate demand, therefore their change has a direct impact on aggregate demand, and taxes and transfers have an indirect effect on aggregate demand, changing the amount of consumer spending ( C) and investment costs (I).

At the same time, the growth of government purchases increases aggregate demand, and their reduction leads to a decrease in aggregate demand, since government purchases are part of aggregate expenditures.

An increase in transfers also increases aggregate demand. On the one hand, since with an increase in social transfer payments (social benefits), the personal income of households increases, and, consequently, other things being equal, disposable income increases, which increases consumer spending. On the other hand, an increase in transfer payments to firms (subsidies) increases the possibilities of internal financing of firms and the possibility of expanding production, which leads to an increase in investment expenses. A reduction in transfers reduces aggregate demand.

Tax increases work in the opposite direction. An increase in taxes leads to a decrease in both consumer spending (as disposable income is reduced) and investment spending (as retained earnings, which is the source of net investment, are reduced) and, therefore, to a reduction in aggregate demand. Accordingly, tax cuts increase aggregate demand. Tax cuts lead to a shift of the AD curve to the right, which causes an increase in real GNP.

Therefore, fiscal policy instruments can be used to stabilize the economy at different phases of the economic cycle.

Fiscal policy The state, as part of fiscal policy, is focused mainly on achieving a balanced budget, balanced in government revenues and expenditures throughout the entire budget period.

Public expenditure policy is designed primarily to satisfy the demand of the public sector, that is, to satisfy the need for spending on urgent government needs, reflected in the budget expenditure items.

Government Revenue Policy proceeds from existing and potential sources of cash flow to the state budget, taking into account the limited possibilities of using these sources, the excess of which can undermine the economy and ultimately lead to the depletion of revenue generation channels.

Tax policy– part of fiscal economic policy, manifested in the establishment of types of taxes, objects of taxation, tax rates, conditions for collecting taxes, tax benefits. The state regulates all these parameters in such a way that the receipt of funds through the payment of taxes ensures the financing of the state budget.

Taxes– obligatory payments of individuals and legal entities levied by the state. Tax classification is presented in Figures 20.2, 20.3.

Figure 20.2 – Types of taxes, Laffer curve

The dependence of tax revenues on the tax rate was described by A. Laffer. The graphical representation of this dependence is called the A. Laffer curve. According to the A. Laffer curve, an increase in tax rates leads to an increase in tax revenues only up to certain limits. A further increase in the tax rate will lead to an excessive tax burden. It leads to the withdrawal of many manufacturers from the market due to bankruptcy and to tax evasion.

The result of these actions is an undesirable decrease in tax revenues to the treasury. The Laffer curve shows that, under certain conditions, a reduction in tax rates can create incentives for business, promote the formation of additional savings and thereby promote the investment process. Reducing bankruptcies should help expand the tax base, since the number of taxpayers should increase.

MINISTRY OF ECONOMIC DEVELOPMENT AND TRADE OF THE RUSSIAN FEDERATION

State educational institution

Higher professional education

"Krasnoyarsk State Trade and Economic Institute"

Department of Economic Theory and Law

Discipline: Economic theory

On the topic: State fiscal policy

Done: Checked:

3rd year student St. teacher

Groups EKT 04-1 Gorzhiy Larisa

Zankova Olga Vasilievna

Igorevna

SHARYPOVO 2006

Introduction

1.1 Displacement effect

Conclusion

Bibliography

Introduction

Fiscal(from Lat. fiscalis - state) policy - a set of financial measures of the state for regulation, government revenues and expenses. It changes significantly depending on such strategic objectives as anti-crisis regulation, ensuring high employment, and fighting inflation.

The main instrument of government policy in the economic sphere is the state budget. A balanced budget means that government revenues, consisting of taxes, fees, and other revenues, are equal to government expenditures. Unfortunately, the balance of expenses and income is rarely achieved in most countries of the world. The “normal” and most common phenomenon can be considered a budget where expenses exceed income within one year. A budget that has a surplus is more rare, i.e. excess of income over expenses. State budget management is fiscal policy.

The state budget is the main instrument of fiscal policy. Its impact on the economy is enormous because the state budget is a political variable. This means that policymakers can change this variable at will, setting themselves very large macroeconomic goals. With the help of fiscal policy, aggregate spending and aggregate demand can be stimulated or limited. Budget deficit can arise due to two main reasons. First, it can be caused by the deliberate actions of a government that, out of necessity, decides to spend more than it has income. The deficit that arises for this reason is called an active budget deficit. Secondly, a budget deficit may arise as a result of a recession, a decrease in real national income, which will reduce budget revenues. This deficit is called a passive budget deficit. For a long time, the prevailing view among economists was that the state budget should always be balanced. However, Keynesians already in the 1930s had a different opinion. Even a relatively small amount of autonomous spending that could be added from some source would be sufficient to multiply aggregate demand. And the government must spend a lot on education, medicine, pensions, road construction, etc. Additionally, the government can manipulate taxes, which ultimately leads to changes in disposable income.

J. Keynes discovered that the main culprit of economic instability is fluctuations in aggregate demand. Therefore, he considered stabilizing demand and maintaining it at a level that ensures full employment as the most important task. In accordance with the recommendations of J. Keynes, after the Great Depression, all Western countries began to implement a stabilization fiscal policy, which was then divided into several types.

1. Types, goals and main instruments of fiscal policy

Expansionary fiscal policy is carried out through an increase in government spending and a decrease in tax rates, which leads to an increase in the budget deficit. The government will cover the overexpenditure (deficit) through loans from the population, insurance companies, industrial firms, etc. It can also borrow from the central bank.

In the event of a recessive gap, an automatic restructuring mechanism will operate. However, Keynesians believe that this mechanism is slow. It will take a long time for factor prices to adjust to restore full employment. Therefore, the government should help this mechanism. Thus, expansionary fiscal policy is carried out in the event of a recessionary gap, when the economy operates below its potential. Keynesians believe that in this case a planned budget deficit is necessary.

Contractionary fiscal policy is based on cutting government spending and increasing tax rates. This type of fiscal policy is used to overcome inflationary gaps. A reduction in government spending will reduce aggregate demand. The same result can be achieved by raising taxes.

Countercyclical fiscal policy is about stimulating economic development in the opposite direction to where cyclical forces are pushing it. This type of policy stimulates demand during a recession and restricts it during a recovery. This means that the government must provide a planned budget deficit if the economy is facing a recession, or a budget surplus during an economic recovery. At the same time, countercyclical fiscal policy should not simply maintain a level of aggregate demand sufficient to ensure full employment. It must do this in a way that does not provoke inflation.

However, budget deficits and surpluses arising from expansionary, contractionary or countercyclical fiscal policies can have different consequences. Moreover, these consequences may influence a significant restructuring of the Keynesian model.

The fundamental goal of fiscal policy is to eliminate unemployment and inflation. During a recession, expansionary fiscal policy is on the agenda. It includes:

1) an increase in government spending, or 2) a decrease in taxes, or 3) a combination of 1 and 2. In other words, if the starting point is a balanced budget, fiscal policy should move in the direction of the government budget deficit during a recession or depression.

Conversely, if the economy experiences inflation caused by excess demand, contractionary fiscal policy is appropriate. Contractionary fiscal policy includes:

1) a reduction in government spending, or 2) an increase in taxes, or 3) a combination of 1 and 2. Fiscal policy should focus on a positive government budget balance if the economy faces the problem of controlling inflation.

1.1 Displacement effect

A decrease in private spending as a consequence of high interest rates arising from the high demand for loan capital to cover the budget deficit is called displacement effect. There are only two ways to finance a budget deficit. An entire deficit budget means that the government, without enough revenue to cover expenses, is living on debt. Therefore, the first way to cover the deficit is to issue government securities (bonds). These securities create demand in the capital market and compete for credit with corporate securities and with other borrowers. As a result, the price of the loan - the interest rate - increases.

A high interest rate is a signal for consumers to reduce purchases of goods that are sensitive to the interest rate (house, car, durable goods). A high interest rate is a signal for investors to postpone spending on new equipment and the construction of plants and factories. After all, a high percentage increases the opportunity costs of investment projects. This results in a repression effect, i.e. a reduction in private spending due to high interest rates that resulted from increased government spending that created a budget deficit.

If an expansionary fiscal policy can cause a crowding out effect, then a restrictive policy has the opposite effect. A reduction in interest rates creates better conditions for purchasing goods on credit and for additional investments. At the same time, this reduces the anti-inflationary significance of restrictive policies, which are applied in the phase of recovery and development of the inflation gap.

In the absence of trade restrictions, goods are exchanged at the same price in all markets (excluding price differences due to different taxes and transportation costs). Pricing principle leveling reflects that producers will increase supply in markets if prices are higher than costs (and vice versa).

This principle also applies to capital markets (credit). With modern technology, anyone who has the financial means to borrow money can offer it in the markets of North America, Australia, Europe, Japan, etc. And everywhere the interest rate (loan price) will be the same, excluding possible differences due to taxes and various expenses for carrying out operations. Example: The US government cuts taxes, which leads to a budget deficit due to a decrease in budget revenues. A loan is needed to cover the deficit. The government turns to the loan capital market, the demand for credit will increase, and with it the interest rate will rise. How will Europeans, for example, react to all this? They will begin to transport their funds to the US loan market, where the price of credit has become higher. The more such transfers there are, the more they will put pressure on the interest rate, forcing it to decrease. How will the influx of foreign credit affect the crowding out effect? This influx, reducing the interest rate, should soften the reduction in demand and reduce the volume of “repressed” demand. A European, before transferring his money to the United States, must convert it into American dollars. Consequently, the demand for US dollars will increase in European foreign exchange markets (ie markets where one currency is exchanged for another). An increase in demand for the dollar will raise the price of the dollar, and the dollar's exchange rate will increase relative to other currencies. How will a higher dollar affect American exports and imports? A more expensive dollar will make imports cheaper for Americans. After all, now you can use it to buy a little more goods abroad. But at the same time, this will make American exports more expensive for foreigners: now, to buy an American product for 1 dollar, you need to pay a little more francs, marks, pounds, etc. for it. Any economist in this situation will make a prediction that the United States will now export less and import more. Net exports will decline, which will lead to a reduction in aggregate demand. Some of the displaced domestic demand will take the form of a fall in net exports. And the influx of loans from abroad will restrain the increase in interest rates. But even a more moderate interest rate will “crowd out” investment and purchases of credit-responsive consumer durables.

In countries with a market economy, the mechanisms for redistributing income are a system of social transfers, the establishment of a minimum wage and a system of progressive taxation of citizens' income, in which the amount of taxes increases as income increases. As a result, the initial unevenness in income distribution is smoothed out. With the help of such measures and the organization on their basis of a system of social protection of the population, the negative social consequences of the market organization of production are weakened. The goals of the internal policy of a state that is just creating a market economy must be to solve the most pressing social problems, otherwise the growing contradictions will make it impossible to continue economic reforms. In addition to tax regulation and social transfer payments, countries with transition economies and developing countries use indexation of income of low-income citizens and regulation of prices for socially important products. State policy during the transition period should help the population survive the difficult economic situation, as well as adapt to market relations. This requires an effective social support system, simplified and updated schemes for employment and retraining of the workforce.

The main attention must be paid to the labor market from the very initial period of transformation, since under socialist management the system of retraining and upgrading the skills of the unemployed and finding jobs was completely undeveloped.

One of the most important instruments of income regulation policy in our country is maintaining a socially acceptable level of minimum wage. In foreign countries, as a rule, it serves as the basis for constructing the entire hierarchical wage structure. The main function of the minimum wage is to ensure the protection of the least paid and vulnerable workers, this is emphasized in the recommendations of the International Labor Organization. It is considered optimal that its size should not be lower than 35-40% of the average wage. In Russia, it has been within 50.8% of the economic average over the past seven years. The extremely low minimum level had a significant impact on the degree of inequality in income distribution.

Fiscal policy has many other, rather complex, consequences. Due to the fact that the US government has reduced taxes, i.e. made a decision regarding internal problems, the dollar became more expensive abroad, and other currencies became cheaper. Now other countries are exporting more to the United States, which leads to an increase in demand for goods from these countries and to higher prices for them. In the USA, taxes were reduced, and prices increased in Europe. This suggests that an open economy is influenced by all other economies. In the international market system, all participating countries are interdependent.

1.2 Fiscal policy and taxes

Today, very often, governments of countries with market economies finance growing expenses not so much through increased taxes, but through loans. This has a good effect on the population; the tax burden of citizens does not increase. But only for a short time. In the near future, these loans, which have become debt, must be repaid. And due to what? There is only one source - taxes. A light burden today will turn into a yoke tomorrow. Low taxes today will turn into high taxes tomorrow. Therefore, some economists believed that, in anticipation of future high taxes, taxpayers should reduce current consumption. These economists consider themselves to belong to the classical school, and the current consumption of taxpayers, and therefore they began to be called neoclassicals.

Neoclassical economists believe that government debt reduces current welfare by the amount of taxes. In their opinion, taxes and debt financing are equivalent concepts, and the budget deficit has a zero result. Let's say that the government issued bonds for 100 billion rubles in order to reduce taxes by the same amount. This government loan increased the demand for credit by 100 billion rubles. If taxpayers accepted that this new debt would not then translate into higher taxes, they would increase consumer spending. Then total costs will increase. However, neoclassical economists believe that another approach is more likely: taxpayers will understand that taxes will be increased in the future. In preparation for this, today they will increase their savings (also by 100 billion rubles) and reduce consumer spending. This increase in savings will allow the government to finance the budget deficit without increasing interest rates. But the price of this government decision was a reduction in consumption by 100 billion rubles, i.e. aggregate demand has not changed because today the government announced a deficit of 100 billion, but decided not to raise taxes yet. This happened because consumers decided to increase savings and what did not go into taxes went into current savings.

The conclusion of the neoclassics: fiscal policy at the cost of public debt does not produce anything positive, but only reduces the current welfare of taxpayers.

1.3 Impact of fiscal policy on supply

In the 1980s, economists first noticed that changes in interest rates can affect not only demand, but also aggregate supply. When taxes are reduced, not only regular income increases, but also income from additional work, from additional investments, from any additional activity. The motive for additional activities increases .

For example, the business transfers part of its profits to various charitable purposes, universities, etc., because this part in this case is not subject to taxes. Driven by selfish motives and realizing that taxes will “eat up” a significant part of the profit, business prefers to give it to purposes that will bring it gratitude, appreciation, sometimes fame, and sometimes profit (from transferring profits to science). And you won’t even get a “thank you” from the tax official. With tax cuts, businesses begin to invest this additional part of their profits.

The motive for expanding productive activity becomes universal, and as a result aggregate supply increases.

But the consequences of the tax cut will not end there. The expansion of aggregate output may be large enough that, even with a reduced tax rate, the absolute volume of tax revenues increases. This is partly what happened in concrete US policy in the 1980s. Tax reform in 1981 lowered the marginal tax rate, and revenues from the wealthiest portion of business increased. For such an expansion in tax revenue to occur, sufficiently strong incentives to expand production are needed. Case studies have shown, for example, that if a 10% cut in the tax rate causes real national income to rise by 2%, this is not enough for the increase in absolute tax revenues from that 2% increase to offset the absolute drop in tax revenues due to for reducing the tax rate.

The impact of tax rates on supply has long-term implications. The full impact of tax cuts or increases on production takes quite a long time.

2. Types of fiscal policy and their importance in regulating the economy

Modern fiscal policy includes direct and indirect financial methods of regulating the economy.

TO direct include methods budget regulation. The budget finances:

a) costs of expanded reproduction

b) unproductive expenses of the state

c) development of infrastructure, scientific research, etc.;

d) implementation of structural policy;

By using indirect methods have an impact on the financial capabilities of goods producers and the size of consumer demand. Plays an important role here system taxation. By changing tax rates on various types of income, providing tax breaks, etc., the state seeks to achieve, perhaps, more sustainable rates of economic growth and avoid sharp ups and downs in production.

Depending on the nature of the use of direct and indirect methods, two types of state fiscal policy are distinguished:

a) discretionary fiscal policy;

b) automatic fiscal policy (built-in stabilizer).

2.1 Discretionary fiscal policy

Discretionary (from the Latin discrecio - acting at one's own discretion) means arbitrary, depending on the conscious decision of the executive branch. Discretionary fiscal policy is a policy that often requires changes in tax laws and laws on government spending programs. But this process is slow. It is slowness that reduces the effectiveness of discretionary fiscal policy. It is sometimes compared to shooting at a fast-moving target: they have just prepared a bill related to the new situation in the economy, but while it was being discussed, this situation is already “outdated” and a new bill needs to be developed.

For example, the authorities decided to pursue an expansionary policy to stimulate aggregate demand, since the economy was in a state of recession. However, while all legislative procedures were followed, this policy came into effect with some delay. As a result, the incentives from these policies took effect only when the economy itself began to return to full employment. Due to the overlap of two unidirectional actions, excess demand arose, and with it a rise in prices began, which pushed an excessive increase in supply. An inflationary gap has begun, and now a restrictive discretionary policy is needed, and the government is still implementing the old decision on an expansionary discretionary policy.

However, discretionary policies do not always depend on legislators. Much more often it is formulated and implemented by the executive branch. Of course, the actions of the executive branch are also within the framework of the law. One type of such discretionary policy is to fine-tune the economy. "Fine tuning" - maintaining the economy at full employment through constant countercyclical adjustments in taxes and government spending.

This is reminiscent of handling the steering wheel of a ship. From time to time it is turned a little to the left, then a little to the right, maintaining the exact course. Unfortunately, “fine tuning” is almost never used. The fact is that to use it you need to have accurate information about the state of the economy at the moment. But fulfilling this requirement is not yet achievable. The government takes into account proven functional dependencies between variables. The first relationship is that increased government spending increases aggregate demand (consumption and investment). As a result, output and employment of the working population increases.

Another relationship shows that an increase in taxes reduces personal disposable income of households. In this case, demand and output and labor employment are reduced. Conversely, tax cuts lead to increases in consumer spending, output, and employment. These dependencies are used in discretionary policies to influence the economic cycle. This policy differs at different phases of the cycle.

For example, during a crisis, a policy of economic growth is pursued. To increase the volume of GNP, government spending is expanded and taxes are reduced, and the increase in spending is combined with a decrease in taxes. The result is a reduction in the decline in production.

When inflationary growth in production occurs (a rise caused by excess demand), the government pursues a policy of restraining business activity - it reduces government spending, increases taxes. As a result, aggregate demand decreases and, accordingly, the volume of GNP decreases.

2.2 Automatic fiscal policy (built-in stabilizer)

This policy is also called automatic stabilization, which ensures countercyclical changes in government spending and tax actions without deliberate discussion or change in fiscal policy. We are talking about the so-called automatic stabilizers, which are applied automatically by the government, because they are provided for by law and “built-in” into the expenditure side of the budget. An automatic stabilizer is an economic mechanism that, without government assistance, eliminates unfavorable situations at different phases of the business cycle. The main built-in stabilizers are tax revenues and social payments.

The basis for such actions is only the presence of a recessive or inflationary gap. There are three main "built-in" stabilizers:

a) Unemployment benefits. If unemployment rises, tax revenues to provide unemployment benefits fall due to an overall decline in employment. But payments for such benefits will increase automatically. In contrast, if the actual unemployment rate is low and employment is high, tax revenues rise and benefits fall. During a recession, the benefit program will have a tax deficit, and during an expansion, it will have a tax surplus. To accurately measure deficits or surpluses, economists use the concept of a full employment budget. The full employment budget shows what surpluses and deficits would be if the economy operated at the IPA level for a full year. During a recession, deficit financing of benefits helps overcome the downturn. During booms, fiscal surpluses reduce demand and help close the inflation gap.

b) Corporate income taxes. Earnings are the most cyclically sensitive form of income. It falls more than other types of income during a recession and rises faster during a recovery. Tax revenues from corporate profits fluctuate similarly. A fall in revenue immediately expands the state budget deficit, while an increase reduces the deficit.

c) Progressive income tax. And in this case, tax revenues will fall during a recession and rise during a recovery, automatically stabilizing the economy, i.e. limiting the depth and scope of cyclic fluctuations.

3. The mechanism for implementing fiscal policy in the transition economy of Russia

Reform of the budget and tax systems in Russia is carried out in difficult conditions of property transformation and the formation of national entrepreneurship. This is due to the restructuring of the sectoral structure of production, the transfer of defense production to the manufacture of competitive products, the implementation of major measures for social protection of the population, etc.

The transition to a market economy has also changed the structure of the revenue side of the state budget, which is largely formed from tax revenues. Therefore, the main task in implementing fiscal policy comes down to reforming the tax system and taxation.

The difficulties in its implementation lie in the fact that the evolution of the Russian tax system has developed for a long time not in accordance with the trends that are characteristic of the economies of developed market countries.

In modern conditions, the main milestones in reforming the Russian tax system have emerged. For the transition period, it becomes important to develop a concept for increasing the stimulating function of taxation in the development of entrepreneurship and the formation of investments.

The strategy of strengthening the stimulating function of taxation and quantitatively increasing investments involves their software. This program should include certain measures of state and territorial authorities, implemented in a logical sequence. These measures include:

ensuring the stability of tax legislation, the inadmissibility of any changes in the tax scheme throughout the entire business year. Moreover, a long-term moratorium on introducing amendments that increase the tax burden is expected;

rejection of the unjustified plurality of taxes, the number of which in Russia alone, taking into account local taxes, is close to one hundred. Elimination of existing discrimination in the differentiation of taxpayers depending on the form of ownership;

establishing low taxes on producers and “cheaper” credit;

strengthening the focus of the tax system. In conditions of decline in production, it is important to place in a privileged position enterprises (firms) that actually increase production volumes and invest in its growth. This can be done in different ways, for example, by exempting from taxes part of the profit received from increasing sales volumes at comparable prices. It is also desirable to completely exempt from taxation the deposits of investors and the profits of enterprises allocated for the development of production, R&D, and the maintenance of social facilities;

giving an effective and specific character to tax benefits, which in most cases are of a declarative and ostentatious nature. As a result, they lose their stimulating value. Newly created or reconstructed enterprises must be provided with benefits not from the moment of their registration, but from the moment they receive their first profit.

As the world experience of developed countries shows, a modern tax system should stimulate scientific and technological progress, structural redeployment of resources and labor, the production of scarce products, and the development of entrepreneurship. At the same time, it must suppress such negative trends as monopolism, rising costs, speculative activity, and inflation.

This is the general concept of restructuring the tax system of a transition economy in the direction of unconditional economic growth while simultaneously maximizing the individual wealth of taxpayers and tax revenues to the budget.

As a result, the economic dynamics of society will be ensured through the concentration of tax revenues to the budget and the directions of budget allocations for investing funds in various structures and programs, as well as the socio-cultural sphere. It is through the budget that direct and feedback connections are realized to regulate and maintain the macroeconomic equilibrium of aggregate demand and aggregate supply.

The functions of taxation in ensuring investment are not abstract. They carry out the tasks of resource and monetary support for this process according to developed programs. These are direct connections.

In turn, economic growth and expansion of the scale of production increase the tax field and the reverse increase in the flow of resources. These are feedback links in general economic dynamics.

Unfortunately, there is a huge difference between fiscal policy on paper and fiscal policy in practice.

The implementation of fiscal policy requires solving some problems of the time.

1. Time lag of recognition. Recognition lag refers to the length of time that elapses between the onset of a recession or inflation and the moment when recognition occurs that it is occurring. It is extremely difficult to accurately predict the future course of economic activity. Although economic forecasting tools such as leading indicators provide insight into the direction of an economy, an economy may already have experienced four or even six months of contraction or inflation before this fact is reflected in relevant statistics and realized.

2. Administrative delay. The wheels of democratic government often turn rather slowly. There will usually be a significant lag between the time the need for fiscal action is recognized and the time the action is actually taken. The $11 billion tax cut, which became law in February 1964, was first proposed to President Kennedy by the Council of Economic Advisers in 1961 and was introduced into Congress by the President in late 1962. Additional taxes on personal and corporate income revenues of 1968, was passed almost a year after it was introduced by President Johnson. In fact, Congress sometimes takes so long to adjust fiscal policy that the economic situation changes completely at that time and the proposed measures become completely inappropriate.

3. Functional delay. In addition, there is also a time lag between the time Congress decides on fiscal measures and the time those measures begin to have an impact on output, employment, or the price level. Although changes in tax rates can be introduced fairly quickly, government spending on public works - such as building dams, roads, etc. - involves long planning periods and even longer construction periods. Therefore, such spending has very dubious benefit in counteracting short - say 6 to 18 months - downturns. Because of these types of problems, discretionary fiscal policy focuses primarily on changes in taxes.

Fiscal policy is formed in the political arena, and this greatly complicates its use for the purposes of stabilizing the economy.

1. Other (other) goals. Economic stability is not the only goal of government spending and taxation policies. The government is also involved in solving the problems of providing goods and services for general consumption and redistributing income. Fiscal policies of state and local governments are often pro-cyclical. Thus, state and local governments, as well as households and private entrepreneurs, tend to increase spending in times of prosperity and cut back in times of recession.

2. Addiction to incentive measures. Deficits tend to be politically attractive, while budget surpluses tend to be politically painful. That is, there may be a political bias in favor of deficits, fiscal policy may embody a bias towards stimulating the economy and inflation. Tax cuts are very popular politically. Increases in government spending are also popular, especially if specific politicians' constituencies benefit from it. Increasing taxes tends to worry voters, while cutting government spending can be politically risky.

3. Politically driven business cycle? Some economists emphasize that the overarching goal of politicians is not necessarily to act in the interests of the national economy, but rather to get re-elected. Some economists have recently suggested that there is a politically driven business cycle. That is, they believe policymakers can manipulate fiscal policy to maximize voter support even if their fiscal decisions tend to destabilize the economy. According to these views, fiscal policy can be corrupted by political ends and cause economic fluctuations.

It looks like this. The population takes into account economic conditions when voting. Those in power will be punished at the polls, but if the economy is booming, they will be rewarded. Consequently, as the election deadline approaches, the administration in power will turn to tax cuts and increased government spending. These steps will be very popular not only in themselves, but also as the resulting stimulus given to the economy, which will push all key economic indicators in the right direction. Production and real incomes increase; unemployment is reduced; and the price level will be relatively stable. As a result, politicians in power will benefit from a very cordial economic environment conducive to their re-election bid. But since the election, continued economic growth has been increasingly reflected in rising prices and less in rising real incomes. Growing public concern is prompting policymakers to introduce contractionary fiscal policies in this situation. Roughly speaking, a “made in Washington” recession would involve cutting government spending and increasing taxes to curb inflation. But won't this recession hurt those in power? Not really, since the next election is still two or three years away and most voters base their views on the administration on the state of the economy in the 12 months or so leading up to the election. Indeed, the recession creates a new launching pad from which fiscal policy can again be used to trigger a new economic recovery during the next election campaign.

This possible perversion of fiscal policy is both very troubling and inherently very difficult to prove. Although the empirical evidence is highly mixed and inconsistent, there is some evidence to support this political theory of the business cycle.

Conclusion

1. The state budget is the most important instrument of fiscal policy. Fiscal policy involves deliberate changes in taxes and government spending to influence the overall level of economic activity.

2. Maintaining aggregate demand at the level of full employment in the economy reduces economic instability.

3. The Keynesian model is based on the need for an expansionary fiscal policy during a recession and a restrictive one during a recovery.

4. Countercyclical fiscal policy has a number of side effects that were not taken into account in early Keynesian analysis. Studies of the crowding-out effect have found that budget deficits increase the demand for credit and therefore increase the interest rate (the price of credit). If excess capacity exists, stimulating demand leads to increased production and income, which increases savings. In this case, the effect of displacement is limited. However, if the supply of credit does not change, then a higher interest rate crowds out private spending, which offsets the increase in spending due to the budget deficit.

5. Neoclassicists believe that replacing taxes with government debt only changes (postpones) the timing of taxation. Taxpayers, expecting higher taxes in the future due to rising government debt, reduce current consumption by an amount quite equivalent to such taxes. They put this amount into savings, which allows the government to finance the deficit without changing the price of borrowing. Therefore, replacing taxes with debt does not change the interest rate, aggregate demand, aggregate supply, or unemployment.

6. When fiscal policy involves changes in marginal tax rates, it affects aggregate supply. Low rates stimulate economic activity and lead to increased supply. Most economists believe that, in the short run, the impact on aggregate demand is dominated by the effect that changes in taxes have on the economy. The impact on aggregate supply is a long-term issue. It cannot be used as a counter-cyclical tool.

7. The economy is in constant dynamic motion, changing market conditions. Therefore, an accurate macroeconomic forecast is always very difficult. At the same time, discretionary changes in fiscal policy should maintain economic stability. If macroeconomic information is imperfect, discretionary policy partially loses its effectiveness due to errors in the timing of taking certain measures. At the same time, automatic stabilizers are independent of the time factor.

8. Over the past decades, the budget deficit has decreased during periods of expansion and increased during periods of recession. This reflected more the impact of automatic stabilizers than the impact of discretionary changes in fiscal policy.

Bibliography

1. Dobrynin A.I. Economic theory: textbook / A.I. Dobrynin, L.S. Tarasevich. - 3rd ed., revised. - St. Petersburg: Peter, 2000. - 544 p.

2. Borisov. E.F. Economic theory: textbook / E.F. Borisov. - 3rd ed., revised. - M.: Yurait - Publishing House, 2004. - 399 p.

3. Lyubimov L.L. Fundamentals of economic knowledge: textbook / L.L. Lyubimov, N.A. Ranneva. - M.: Vita-Press, 2000. - 496 p.

4. Course of economic theory: textbook / ed. M.I. Plotnitsky. - Mn.: Interpressservice, Misanta, 2003. - 496 p.

5. Kamaev V.D. Textbook on the basics of economic theory (economics): textbook / V.D. Kamaev. - M.: Vlados, 2003. - 384 p.

6. Tarasevich L.S. Macroeconomics. Textbook. / L.S. Tarasevich, P.I., Grebennikov, A.I. Leussky. - M.: YURAYT. - 2003. - 650 p.

7. Nureyev R. Theory of development: Keynesian models of the formation of a market economy / R. Nureyev // Questions of Economics. - 2000. - No. 4. - p.137 - 156.

8. Kuznetsova O. Theoretical foundations of state regulation of the economy. / About Kuznetsova // Economist. - 2002 - No. 4. - p.46-66.

1. Discretionary fiscal policy

2. Non-discretionary fiscal policy. Built-in stabilizers

3. Problems arising in the process of implementing fiscal policy

4. Public debt

6.1 Discretionary fiscal policy

Fiscal policy is the policy of government spending and taxation. Discretionary fiscal policy refers to the deliberate manipulation of taxes and government spending in order to change the real volume of national output and employment, control inflation and accelerate economic growth.

How does government spending affect the economy?

Let's assume that the government has decided to purchase goods and services worth $20 billion at any level of NNP. It is obvious that taking into account government expenditures will cause the graph of total expenditures to move relative to the bisector and will lead to a multiplied increase in NNP. This is clearly visible in the aggregate expenditure-output graph (Figure 6.1).

The same can be seen from the table given in the previous lecture. An increase in government spending by $20 billion will lead to an increase in total spending at all levels of NNP. Based on the fact that the equilibrium condition for NNP is C + I n + X n + G = NNP, it can be determined that the equilibrium NNP will increase from $470 billion to $550 billion, i.e., it will increase by $80 billion . = 20 billion dollars  MULT.

Rice. 6.1- Impact of government spending on equilibrium NNP

The impact of growth in government spending on equilibrium NNP can also be seen in the “withdrawal-injection” model (Fig. 6.2).

R is. 6.2- Impact of government spending on equilibrium NNP

in the “withdrawal-injection” model

Thus, the equilibrium conditions for NNP in the “withdrawal-injection” model will be:

Now let's look at how the government collects taxes affects the economy. For simplicity, let's assume that at any level of NNP the government collects the same amount of taxes, say $20 billion. How will the introduction of taxes affect the economy? Since the introduction of taxes will reduce after-tax income (by $20 billion), this will reduce consumption and savings at each level of NNP. By what amount? This is determined by the value of MPC, MPS. If MPC = ¾ and MP5 = ¼, then consumption will decrease by $15 billion and savings by $5 billion.

P Let us illustrate the impact of introducing taxes in the amount of $20 billion on the graph (Fig. 6.3).

Rice. 6.3 - The impact of taxes on equilibrium NNP

in the “total expenditures – output” model

C a – consumption after the introduction of taxes. An increase in taxes causes a shift in the schedule of aggregate expenditures relative to the bisector (in our case, with T = 20 billion dollars, MPC = ¾ by 15 billion dollars) and a reduction in the value of the equilibrium NNP. (From the table given in the previous lecture, it can be calculated that the equilibrium NNP will decrease from 550 billion dollars to 490 billion dollars).

T Let us now illustrate the impact of introducing taxes on the graph of the “withdrawal-injection” model (Fig. 6.4).

Rice. 6.4- Impact of taxes on equilibrium NNP

in the “withdrawal-injection” model

The analysis here is somewhat more complex, since the introduction of a tax of 20 billion dollars has a two-way effect: firstly, taxes lead to a reduction in DI and, at MPS = 1/4, to a decrease in savings by 5 billion dollars at any NNP level. This is shown on the graph by a shift of the S + M curve by $5 billion down to the S a + M curve (savings after taxes + imports). Second, the $20 billion in taxes is an additional withdrawal from the revenue-expenditure flow and therefore must be added to the withdrawal amount. That is, the total amount of withdrawals will be S a + M + T, which shifts the S a + M curve by 20 billion. dollars up, which will lead to a reduction in NNP.

Now the equilibrium in the “withdrawal-injection” model is determined by the condition:

S a + M + T = I n + X + G

A reduction in taxes will cause the graph of aggregate expenditures to move upward in the “expenditure-output” model and the graph S a + M + T to decrease in the “withdrawal-injection” model and will cause an increase in the equilibrium NPP.

Please note: we increased government purchases of goods and services by $20 billion and increased taxes by $20 billion. As a result, the equilibrium NNP also increased by $20 billion. That is, an equal increase in government spending and taxes leads to an increase in NNP by an amount equal to the increase in G and T. This means that the balanced budget multiplier is equal to one.

This is explained by the following: changes in government spending have a stronger impact on total spending because they are a component of total spending. Therefore, if government spending increased by $20 billion, then total spending will increase by $20 billion, and NNP as a result of the multiplier will increase by $80 billion. And a change in taxes affects total spending indirectly, through a change in consumption. In this case, the change in consumption will be less than the change in taxes, since it is determined by the MPC, which is always less than 1. As a result, the increase in NNP as a result of an increase in government spending will always be greater than the decrease in NNP as a result of the introduction of taxes by the same amount . In this case, the net increase in NNP will be equal to the initial increase in G and T.

So, we have seen that fiscal policy can be used to stabilize the economy. In the most simplified form, fiscal policy in different phases of the cycle can be reduced to the following. In the recession phase, in order to increase production and eliminate unemployment, the government should pursue a stimulating fiscal policy. To do this you should:

a) increase government spending;

b) reduce taxes;

c) combine a) and b).

It is obvious that these measures lead to an increase in the state budget deficit.

During the recovery phase, to eliminate inflation caused by excess demand, the government must pursue a contractionary fiscal policy. To do this you should:

a) reduce government spending;

b) increase taxes;

c) combine a) and b).

This policy leads to the emergence of budget surpluses (a positive balance of the government budget).

The effectiveness of stimulating fiscal policy depends not only on the size of the state budget deficit, but also on the methods of financing it, which can be carried out through loans from the population (through the sale of interest-bearing securities); or by issuing new money. These methods of financing government deficits have different effects on aggregate spending.

When the government borrows funds from the public, it enters into competition with private individuals for funds. This leads to higher interest rates, which in turn reduces investment and consumption. If the government finances the budget deficit by issuing new money, this can be avoided. Thus, creating new money is a more stimulating way to finance deficit spending compared to borrowing.

The deflationary impact of budget surpluses depends on how the government uses them. If the government uses the budget surplus to pay off its domestic debt, it will return its excess tax revenue to the money market, thereby lowering the interest rate and increasing investment and consumption. If the government simply withdraws excess amounts from circulation, it will achieve a greater anti-inflationary effect.

What specific combination of measures should the government choose in each phase of the cycle? It depends on your political orientation. Economists who advocate active government intervention in the economy recommend an increase in government purchases during a recession and an increase in taxes during inflation. Economists who advocate reducing government intervention in the economy recommend increasing aggregate spending by cutting taxes during a recession and reducing aggregate spending by reducing government purchases during inflation.

Plan 1. State budget and its structure 2. Taxes and their types 3. Optimal level of tax rate 4. Shifting the tax burden 5. Budget deficit

1. State budget and its structure Fiscal policy, like monetary policy, is an important tool for macroeconomic regulation. What kind of policy is this?

Fiscal Policy Fiscal policy is the government's influence on the level of business activity by CHANGING government spending and taxation. This policy affects: A) the level of ND, B) the level of production volume,

Influence C) employment level, D) price level. The significance of such a policy: until 1965, it was used first of all (of all other instruments of government regulation). It was only after 1965 that monetary policy came to the fore.

STATE BUDGET What is the STATE BUDGET? A GOVERNMENT BUDGET is a financial account that contains the AMOUNT of government revenues and expenses for a certain period (usually 1 year).

EXECUTION OF THE BUDGET EXECUTION of the state budget and analysis of its execution are especially important. This may create a discrepancy between government intentions and actual expenditure and revenue flows.

OFF-BUDGETARY funds In addition to the federal budget, there are also OFF-BUDGETARY funds for the social sphere. For example, in Russia these are: Pension Fund, Social Insurance Fund, Mandatory Medical Insurance Fund.

Budgets Also, in countries with a federal structure, the federal budget and the budgets of regions (republics, lands, states), municipal budgets, etc. differ. The division of fiscal powers between levels of government is called TAX AND BUDGET FEDERALISM.

COMPROMISE Budget is always a COMPROMISE between different social groups. These groups are represented in parliaments by elected politicians. After all, approving budget numbers is not a mathematical equation.

Budget recipients Behind the budget items are real “budget recipients” - education workers, healthcare workers, military personnel, regions and regions. An increase in spending on one item inevitably reduces all other expense items. Moreover, the budget is formed under strong pressure from LOBBYISTS.

2. Taxes and their types Taxes provide a significant portion of revenues to the budget revenues. Taxes are mandatory payments levied by the state from legal entities and individuals.

Main categories The main categories in tax legislation are the concepts: OBJECT OF TAXATION and TAX RATE.

OBJECT OF TAXATION OBJECT OF TAXATION – property on the value of which tax is charged. TAX RATE – the amount of tax per unit of taxation.

Division of taxes Taxes are divided into DIRECT and INDIRECT. DIRECT TAXES are levied on the direct owner of the taxable item. The most famous of direct taxes is INCOME TAX.

INCOME TAX INCOME TAX was introduced in England since 1799, in the USA since 1913. In Russia - since 1917. Direct taxes also include: income tax, inheritance and gift tax, property tax.

Indirect taxes Indirect taxes are paid only by the final consumers of the taxed product. And sellers play the role of agents in transferring the money they receive to pay taxes to the state. Indirect taxes include: VAT (value added tax), sales tax, excise taxes, customs duties.

Nature of tax assessment According to the nature of tax assessment, they are divided into: PROGRESSIVE, REGRESSIVE, PROPORTIONAL.

PROGRESSIVE TAXATION Under PROGRESSIVE TAXATION, tax rates increase as the object of the tax increases. That is, the owner of BIGGER income pays not only a BIGGER amount in absolute terms, but also in relative terms - in comparison with the owner of LESS income.

Tax scale For example, from 1998 to 2002, the following income tax scale was in effect in Russia:

Tax rates Amount of income for 1 year Amount of tax 1. Up to 20,000 rubles. 12% 2. From 20,001 to 40,000 rubles. 2400 rub. + 15% from the amount above 20,000 rubles. 3. From 40,001 to 60,000 rubles. 5400 rub. + 20% from the amount above 40,000 rubles. 4. From 60,001 to 80,000 rubles. 9400 rub. + 25% from the amount above 60,000 rubles. 5. From 80,001 to 100,000 rubles. 14400 rub. + 30% from the amount above 80,000 rub. 6. From 100,001 rub. and above 20400 rub. + 35% from the amount above 100,000 rubles.

New rate But since 2001, a single rate of 13% has been introduced for all income levels. This is a proportional tax.

Proportional tax A proportional tax is a tax in which the tax rate remains unchanged, regardless of the value of the object of taxation.

Regressive tax A regressive tax is a tax that is EQUAL in monetary terms for all payers. That is, it takes more from low incomes and less from high incomes. These include INDIRECT TAXES, which are levied on the purchase of goods subject to excise duty (alcohol, black caviar).

TAX SYSTEM All taxes in the country are combined into a system. TAX SYSTEM is a set of taxes and fees levied on payers in the manner and under the conditions determined by the Tax Code.

Three levels The tax system in the Russian Federation consists of THREE levels: Federal level, Regional level, Local level.

Federal taxes Level Tax name Federal Value added tax, excise taxes, corporate income tax, personal income tax, mineral extraction tax, fees for the use of wildlife and for the use of aquatic biological resources, water tax, state duty. Regional Property tax of organizations, transport tax Local Land tax, property tax of individuals

BENEFITS For each tax there are BENEFITS for certain categories of citizens and legal entities. For example, there is a benefit when paying income tax for citizens if they have a child. There is a benefit for disabled people when paying property taxes, etc.

Principles of taxation Principles of taxation in the Russian Federation: 1. legality. 2. the principle of clarity and unambiguity of the legal norm, 3. the principle of mandatory payment of taxes and fees, 4. the principle of the non-discriminatory nature of taxes and fees,

Principles of taxation 5. the principle of economic justification, 6. the principle of establishing all elements of taxation, 7. ensuring a single economic space of the Russian Federation, 8. all irremovable doubts, contradictions and ambiguities in acts of legislation on taxes and fees are interpreted in favor of the taxpayer.

The role of taxes Taxes play a decisive role in the formation of state revenues. This is how the FISCAL function of taxes is manifested, i.e. replenishing treasury revenues. In addition, taxes significantly influence the structure of the economy and the economic behavior of people. This is the REGULATORY function of taxation.

The influence of taxes The regulatory function of taxes is manifested in the TAX POLICY of the state. The state can express its priorities in preferential tax rates or tax exemptions, for example for small businesses.

The influence of taxes Taxes also largely influence the formation of incentives and expectations of the population. High tax levels can cause a decline in economic activity and concealment of income.

Multiplication table Back in 1728, the English writer Jonathan Swift discovered the “tax multiplication table”. According to it, when taxes are raised, the effect of “twice two” does not mean the result of “four”, and can be equal to “one”.

3. Optimal tax rate What tax rate should be set? Is there an optimal level for the tax rate in general? And if there is such a level, is this level the same in different countries?

LAFFER CURVE The relationship between tax rates and state budget revenues was described by the American economist Arthur LAFFER. He depicted this connection in the form of a CURVE called the LAFFER CURVE. The curve shows that the government's desire to replenish the treasury by increasing the tax burden leads to the opposite results.

LAFFER CURVE At level M, the size of tax rates is optimal; it ensures the greatest flow of money into the budget. If you increase the tax rate above this level, then the flow of money will drop to 0.

Threat A tax rate that takes away all income is CONFISCATION. In response to this threat, legal businesses will fold or go into the shadows.

Income level Laffer believed that if the economy is at a point above M, then a reduction in tax rates will bring tax revenue closer to the level of point M. And this will be the MAXIMUM level of state budget revenues.

INCENTIVES Why does this happen? Because lower tax rates will increase INCENTIVES to work, save and invest, which will lead to a larger tax base. In addition, lowering tax rates WILL REDUCE social budget expenditures, for example, on unemployment benefits.

Criticism Laffer's critics objected to this. 1. According to their research, there is no direct relationship between lowering tax rates and increasing labor supply. 2. Reducing tax rates will cause positive effects only over a long period of time, but in the meantime it will cause a reduction in treasury revenues.

Criticism 3. It is not known at what point of the curve the economy is located right now - above or below point M. If it is actually below this point, then this will not stimulate the economy, but will simply cause a decrease in treasury revenues. Therefore, the Laffer curve is useful, but it is difficult to find the point at which a country's economy actually lies.

4. Shifting the tax burden The essence of the problem is that the formal and real tax burdens DO NOT ALWAYS coincide. That is, taxes do not always go to the state budget from those sources that are taxed by law. THE BURDEN OF TAXES MAY SHIFT FROM ONE SUBJECT OF TAXATION TO OTHERS.

Arrangement But how does this arrangement take place? Let's look at some taxes from this point of view. PERSONAL INCOME TAX. This tax is usually paid by those who are required to pay it by law. But there are also exceptions.

Translation Private doctors and lawyers who pay tax can raise rates for their services. In this way, the tax will be passed on to those who use their services. It is difficult to avoid this, because toothache requires the services of a dentist.

Income Tax This tax can be partially passed on to consumers through higher prices. Monopoly firms will abuse their power in the market.

Sales and Excise Taxes The bulk of sales and excise taxes are passed on to consumers through higher prices. It is especially easy to pass on excise taxes on gasoline, tobacco, and alcohol to consumers.

Property tax It is usually paid by those who own property. But if you rent out a house or apartment, then part of the tax burden is shifted to the tenant by increasing the rent rate.

5. Budget deficit State budget revenues and expenditures do not always coincide. If spending is MORE than revenue, then the government runs a BUDGET DEFICIT. If income exceeds expenses, then this is a BUDGET SURPLUS.

Budget deficit There is a distinction between primary and general budget deficits. PRIMARY DEFICIT is the total government budget deficit minus the amount of interest payments on the government debt.

Budget deficit There are also actual, structural and cyclical budget deficits. ACTUAL DEFICIT is the difference between actual government revenues and actual government expenditures.

STRUCTURAL DEFICIT STRUCTURAL DEFICIT is the difference between income and expenses that would exist in the economy at FULL EMPLOYMENT. CYCLIC DEFICIT is the difference between the actual and structural government budget deficit. Such shortages are a consequence of fluctuations in economic activity during the business cycle.

Financing the Deficit How is the budget deficit financed? There are TWO main ways of financing the budget deficit: 1. issuing new money, i.e. the ISSUING method of financing, 2. issuing loans (internal and external), i.e. the non-issuing method of financing.

Emission method The Ministry of Finance borrows a certain amount from the Central Bank by selling government securities to it. The ministry spends these funds and they go to the accounts of commercial banks. The reserves of these banks increase and the banks increase their lending.

Emission method This is how the money supply grows, or rather the monetary aggregate M 1. This is the EFFECT OF MONETIZATION of public debt. With almost full employment, this increases the risk of inflationary price increases. Therefore, this method is often called INFLATIONAL.

Non-inflationary method In this method, the state borrows money not from the Central Bank, but from commercial banks and the population. But at the same time, interest rates will rise. Due to rising interest rates, private investment will decrease. Consumer spending on durable goods will also decline.

THE CROWDING OUT EFFECT This is the essence of the crowding out effect: Government fiscal expansion causes interest rates to rise and crowds out private investment spending.

6. Two types of policies Fiscal policy is divided into 2 types: DISCRETIONAL (flexible) policy, NON-DISCRETIONAL (automatic) policy.

DISCRETIONARY fiscal policy is the deliberate manipulation by the government of taxation and budget expenditures to influence the level of economic activity.

DISCRETIONAL In this way the state influences the volume of production, the price level, employment, and the acceleration of economic growth. At the same time, legislative bodies purposefully adopt relevant laws on the volume of government spending, tax rates, adoption of new taxes, etc.

DISCRETIONAL Discretionary policies have a direct impact on aggregate spending. However, increased government spending may not be financed by an influx of tax revenue. The source of government spending is the budget deficit.

DISCRETIONAL That is, the government, when fighting recessions, can both increase government spending and reduce taxes. What has the greatest impact on the economy? Government spending policies have a GREAT stimulating effect.

DISCRETIONAL In this way there is a DIRECT impact on total costs. And changes in taxes have an INDIRECT impact on the level of national income.

DISCRETIONAL Thus, INCENTIVE discretionary fiscal policy involves INCREASING government spending and/or REDUCING tax rates. On the contrary, a contractionary discretionary policy involves a REDUCTION of government spending and/or an increase in tax rates.

STIMULATIVE policies are implemented to combat recessions and cyclical unemployment. The main problem in this case is what phase of the cycle the economy is in, and is there really a recession in the economy?

CHOICE OF TIME This is the main problem in the implementation of politics - the problem of CHOICE OF TIME. This complicates discretionary policy. But there is another type of policy - non-discretionary (automatic) fiscal policy.

AUTOMATIC fiscal policy is an automatic change in the level of tax revenues, independent of government decisions. This policy is the result of the action of AUTOMATIC, built-in STABILIZERS.

The main stabilizers The main stabilizers are unemployment benefits and progressive taxation. For example, during a recession, income decreases and the tax burden decreases at the same time. An increase in the budget deficit means an automatic increase in the total amount of unemployment benefits and other social benefits.

Main Stabilizers During a boom, tax revenues AUTOMATICALLY increase - due to progressive taxation. The tax pressure is intensifying and holding back growth. Unemployment benefits are also automatically reduced.

Impact Thus, budget deficits have a STIMULATIVE IMPACT, while budget surpluses have a contractionary effect on the economy.

Assessment Such stabilizers cannot COMPLETELY prevent unwanted fluctuations in aggregate demand. But stabilizers can REDUCE the oscillation range by almost 33%. In practice, governments in developed countries pursue COMBINED policies that combine discretionary and non-discretionary methods.

Fiscal policy, its goals and instruments

Fiscal policy is the measures taken by the government to stabilize the economy by changing the amount of government budget revenues and/or expenditures. (This is why fiscal policy is also called fiscal policy.)

The goals of fiscal policy, like any stabilization (countercyclical) policy aimed at smoothing out cyclical fluctuations in the economy, are to ensure: 1) stable economic growth; 2) full employment of resources (primarily solving the problem of cyclical unemployment); 3) stable price level (solving the problem of inflation).

Fiscal policy is the government's policy of regulating, first of all, aggregate demand. Regulation of the economy in this case occurs by influencing the amount of total expenditures. However, some fiscal policy instruments can be used to influence aggregate supply through influencing the level of business activity. Fiscal policy is carried out by the government.

The instruments of fiscal policy are expenditures and revenues of the state budget, namely: 1) government procurement; 2) taxes; 3) transfers.

Impact of fiscal policy instruments on aggregate demand

Therefore, fiscal policy instruments can be used to stabilize the economy at different phases of the economic cycle.

Moreover, from the simple Keynesian model (the “Keynesian cross” model) it follows that all instruments of fiscal policy (government purchases, taxes and transfers) have a multiplier effect on the economy, therefore, according to Keynes and his followers, regulation of the economy should be carried out by the government with using the tools of fiscal policy, and above all by changing the amount of government purchases, since they have the greatest multiplier effect.

Depending on the phase of the cycle in which the economy is located, fiscal policy instruments are used differently. There are two types of fiscal policy: 1) stimulating and 2) contractionary.

Expansionary fiscal policy is applied during a recession (Figure 10.1(a)), aims to reduce the recessionary output gap and reduce the unemployment rate and is aimed at increasing aggregate demand (aggregate expenditure). Its tools are: a) increasing government procurement; b) tax reduction; c) an increase in transfers. Contractionary fiscal policy is used during a boom (when the economy overheats) (Fig. 10.1.(b)), aims to reduce the inflationary output gap and reduce inflation and is aimed at reducing aggregate demand (aggregate expenditures). Its tools are: a) reduction of government procurement; b) increase in taxes; c) reduction in transfers.

In addition, fiscal policy is distinguished: 1) discretionary and 2) automatic (non-discretionary). Discretionary fiscal policy is a legislative (official) change by the government in the amount of government purchases, taxes and transfers in order to stabilize the economy.

Automatic fiscal policy is associated with the action of built-in (automatic) stabilizers. Built-in (or automatic) stabilizers are instruments whose value does not change, but the very presence of which (their integration into the economic system) automatically stabilizes the economy, stimulating business activity during a recession and restraining it during overheating. Automatic stabilizers include: 1) income tax (including both household income tax and corporate income tax); 2) indirect taxes (primarily value added tax); 3) unemployment benefits; 4) poverty benefits.

Let's consider the mechanism of the impact of built-in stabilizers on the economy.

The income tax works as follows: during a recession, the level of business activity (Y) decreases, and since the tax function has the form: T = tY (where T is the amount of tax revenue, t is the tax rate, and Y is the amount of total income (output)), then the amount of tax revenues decreases, and when the economy “overheats”, when the value of actual output is maximum, tax revenues increase. Note that the tax rate remains unchanged. However, taxes are withdrawals from the economy that reduce the flow of expenses and, therefore, income (remember the circular model). It turns out that during recession the withdrawals are minimal, and during overheating they are maximum. Thus, due to the presence of taxes (even lump sum, i.e. autonomous), the economy automatically “cools down” when it overheats and “heats up” during a recession. As was shown in Chapter 9, the appearance of income taxes in the economy reduces the value of the multiplier (the multiplier in the absence of an income tax rate is greater than in its presence: >), which enhances the stabilizing effect of the income tax on the economy. It is obvious that a progressive income tax has the strongest stabilizing effect on the economy.

Value Added Tax (VAT) provides built-in stability in the following ways. During a recession, sales volume decreases, and since VAT is an indirect tax, part of the price of a product, when sales volume falls, tax revenues from indirect taxes (withdrawals from the economy) decrease. In overheating, on the contrary, as total incomes rise, sales volume increases, which increases indirect tax revenues. The economy will automatically stabilize.

As for unemployment and poverty benefits, the total amount of their payments increases during a recession (as people begin to lose their jobs and become poor) and decreases during a boom, when there is “overemployment” and rising incomes. (Obviously, to receive unemployment benefits, you need to be unemployed, and to receive poverty benefits, you need to be very poor). These benefits are transfers, i.e. injections into the economy. Their payment contributes to the growth of income, and, consequently, expenses, which stimulates economic recovery during a recession. A decrease in the total amount of these payments during a boom has a restraining effect on the economy.

In developed countries, the economy is regulated by 2/3 through discretionary fiscal policy and 1/3 by the action of built-in stabilizers.

The Impact of Fiscal Policy Instruments on Aggregate Supply

It should be borne in mind that fiscal policy instruments such as taxes and transfers act not only on aggregate demand, but also on aggregate supply. As noted, tax cuts and increased transfers can be used to stabilize the economy and combat cyclical unemployment during recessions, stimulating growth in aggregate spending and hence business activity and employment. However, it should be borne in mind that in the Keynesian model, simultaneously with the growth of aggregate output, the reduction of taxes and the growth of transfers causes an increase in the price level (from P1 to P2 in Fig. 10-1(a)), i.e. is a pro-inflationary measure (provokes inflation). Therefore, during a boom period (inflationary gap), when the economy is “overheated” (Fig. 10-1(b)), an increase in taxes can be used as an anti-inflationary measure (the price level decreases from P1 to P2) and tools for reducing business activity and stabilizing the economy and reduction in transfers.

However, since firms view taxes as costs, an increase in taxes leads to a reduction in aggregate supply, and a decrease in taxes leads to an increase in business activity and output. A detailed study of the impact of taxes on aggregate supply belongs to the economic adviser to US President R. Reagan, an American economist, one of the founders of the concept of “supply-side economics” Arthur Laffer. Laffer constructed a hypothetical curve (Fig. 10-2.), with the help of which he showed the impact of changes in the tax rate on the total amount of tax revenues to the state budget. (This curve is called hypothetical because Laffer made his conclusions not on the basis of an analysis of statistical data, but on the basis of a hypothesis, i.e. logical reasoning and theoretical inference).

Using the tax function: T = t Y, Laffer showed that there is an optimal tax rate (t opt.), at which tax revenues are maximum (T max.). If the tax rate is increased, the level of business activity (aggregate output) will decrease and tax revenues will decrease because the tax base (Y) will decrease. Therefore, in order to combat stagflation (a simultaneous decline in production and inflation), Laffer in the early 80s proposed a measure such as reducing the tax rate (both income and corporate profits).

The fact is that, in contrast to the impact of tax cuts on aggregate demand, which increases production volume but provokes inflation, the impact of this measure on aggregate supply is anti-inflationary in nature (Fig. 10.3), i.e. production growth (from Y1 to Y*) is combined in this case with a decrease in the price level (from P1 to P2).

Advantages and disadvantages of fiscal policy

The advantages of fiscal policy include:

Multiplier effect. All fiscal policy instruments, as we have seen, have a multiplier effect on the value of equilibrium aggregate output.
No external lag (delay). External lag is the period of time between the decision to change a policy and the appearance of the first results of its change. When the government decides to change fiscal policy instruments, and these measures come into effect, the result of their impact on the economy manifests itself quite quickly. (As we will see in Chapter 13, an external lag is characteristic of monetary policy that has a complex transmission mechanism (monetary transmission mechanism)).
Availability of automatic stabilizers. Since these stabilizers are built-in, the government does not need to take special measures to stabilize the economy. Stabilization (smoothing out cyclical fluctuations in the economy) occurs automatically.

Disadvantages of fiscal policy:

1. Displacement effect. The economic meaning of this effect is as follows: an increase in budget expenditures during a recession (increase in government purchases and/or transfers) and/or a reduction in budget revenues (taxes) leads to a multiplicative increase in total income, which increases the demand for money and increases the interest rate on money market (loan price). And since loans are primarily taken out by firms, an increase in the cost of loans leads to a reduction in private investment, i.e. to “crowding out” part of the investment expenditures of firms, which leads to a reduction in output. Thus, part of total output is “crowded out” (underproduced) due to a reduction in private investment spending as a result of rising interest rates due to the government's expansionary fiscal policy.

2. Presence of internal lag. The internal lag is the period of time between the need to change a policy and the decision to change it. Decisions on changing fiscal policy instruments are made by the government, but their implementation is impossible without discussion and approval of these decisions by the legislative body (Parliament, Congress, State Duma, etc.), i.e. giving them the force of law. These discussions and agreements may require a long period of time. In addition, they come into effect only from the next financial year, which further increases the lag. During this period of time, the economic situation may change. So, if initially there was a recession in the economy, and stimulating fiscal policy measures were developed, then at the moment they begin to take effect, the economy may already begin to recover. As a result, additional stimulation may lead the economy to overheat and provoke inflation, i.e. have a destabilizing effect on the economy. Conversely, contractionary fiscal policies designed during a boom may, due to the presence of a long internal lag, worsen a recession.

3. Uncertainty. This shortcoming is characteristic not only of fiscal, but also of monetary policy. The uncertainty concerns:

problems of identifying the economic situation It is often difficult to accurately determine, for example, the moment when a period of recession ends and recovery begins, or the moment when a recovery turns into overheating, etc. Meanwhile, since at different phases of the cycle it is necessary to apply different types of policies (stimulating or restrictive), an error in determining the economic situation and choosing the type of economic policy based on such an assessment can lead to destabilization of the economy;
the problem of exactly how much the instruments of public policy should be changed in each given economic situation. Even if the economic situation is determined correctly, it is difficult to determine exactly how much, for example, it is necessary to increase government purchases or reduce taxes in order to ensure an economic recovery and reach the potential output, but not exceed it, i.e. How to prevent overheating and acceleration of inflation. And vice versa, when implementing a contractionary fiscal policy, how not to lead the economy into a state of depression.

4. Budget deficit. Opponents of Keynesian methods of regulating the economy are monetarists, supporters of supply-side economics and rational expectations theory - i.e. Representatives of the neoclassical trend in economic theory consider the state budget deficit to be one of the most important shortcomings of fiscal policy. Indeed, the instruments of stimulating fiscal policy, carried out during a recession and aimed at increasing aggregate demand, are an increase in government purchases and transfers, i.e. budget expenditures, and tax reduction, i.e. budget revenues, which leads to an increase in the state budget deficit. It is no coincidence that the recipes for government regulation of the economy that Keynes proposed were called “deficit financing.”

The problem of the budget deficit became especially acute in most developed countries that used Keynesian methods of regulating the economy after World War II, in the mid-70s, and in the United States the so-called “twin debts” arose, in which the government deficit The budget was combined with a balance of payments deficit. In this regard, the problem of financing the state budget deficit has become one of the most important macroeconomic problems.

Editor's Choice

What are the similarities and differences between cells? What are the similarities between different cells?

A cell is a single system that consists of elements that are naturally interconnected and has a complex structure. She...

Assessment of the reign of Catherine II (According to V

Most pre-revolutionary historians considered the second half of the 18th century. the “golden age” of the Russian Empire and considered this time as...

Plant cell structure

The cells of various organs and tissues of higher plants differ from each other in shape, size, color, and internal structure. However for...

See pages where the term set of institutions is mentioned Signs of social institutions: examples

Economic behavior as decision making. Within the framework of economic theory, the behavior of economic agents is actions aimed at...

Nonmetals - preparation for the exam in chemistry

Topic No. 3. CHEMICAL PROPERTIES OF NON-METALS Plan 1. Basic chemical properties of non-metals. 2.Oxides of non-metallic elements....

Graph of the function y = sin x

"Yoshkar-Ola College of Service Technologies" Construction and study of the graph of the trigonometric function y=sinx in a tabular...

Fiscal policy Detailed plan on the topic of fiscal policy of the state

Lecture outline: 20.2 Government expenditures. Expansionary and contractionary fiscal policy. 20.3 Discretionary and automatic...

Can an entity possess a person?

Adding an essence to a person living nearby in the same house or apartment with you is a reason to think about. Since available in...

Illness of Nicholas 2. Illness of the Russian Tsars. The character of Tsarevich Alexei

The family of the last Emperor of Russia, Nicholas Romanov, was killed in 1918. Due to the concealment of facts by the Bolsheviks, a number of...

New

Popular