Economics

Fiscal Policy is the economic term that illustrates governments" behavior in raising funds in order to be able to finance governments" spending. Money can be raised by taxes, borrowing, or by user fees on social services. Fiscal policy is used in order to influence the economic activity. It can include deficit spending to stimulate demand for domestic goods and services to increase (to decrease the unemployment rate) or trying to cut deficits or raise the budget surplus in case of high rate of inflation.

If for instance the economy is experiencing the recession, which means that consumers are not spending as much as they used to, no new investments are done, many business lay off their workers as the demand for their goods or services is low. As the result of all these things nation"s GDP will fall. To prevent that and get a country out of the recession government can stimulate the economy and increase the fallen demand for goods and services. One of the ways to do that is the following: government can lower the taxation rate. When taxes are decreased, consumers" and businesses" income that they can spend will increase. As the result of businesses and consumers spending more money the GDP will increase. Another thing that governments can do to increase GDP is to increase government spending.

On the other side the same tools can be used to slow down the economy. For instance, of the economy is experiencing booms and a quick pace of increasing in prices. To stop the inflation government can increase taxes, decrease government spending, or do both. In this case businesses and consumers will have less money to spend, which will result the decrease in demand for goods and services that will subsequently put an end to the unwanted high rate of inflation.

Fiscal policy is fiercely argued by the economic scholars and critics. Some say that if applied properly fiscal policy is a great and helpful tool to fight recession or inflation. Others, however, say that fiscal policy can lead to a great number of undesired by a country difficulties. For example if the government decreases taxes to decrease high unemployment rate this will result government"s revenues to go down. In order to operate properly government will have to borrow money, which will create budget deficit and subsequently cause an increase in the national debt. If the government will continue raising money from the public it could produce a decrease of supply of available money. This can actually cause the increase in interest rates that will make it more difficult for individuals and businesses to borrow money. Finally, as the result of raising up taxes that would be followed by borrowing can make the recession even worse by discouraging business to invest.

Another alternative for the government is to print money. It will eventually increase the money supply and consequently increase individual and business spending. However, such an increase in the supply of money will result even greater inflation. That is mainly why most of prominent economists are totally against using this strategy.

Political circumstances also have a great impact on deciding about the fiscal policies. It is obvious that none of the Presidents that runs for the second time will want to increase taxes or reduce spending because it will significantly decrease his/her popularity among the public that elects the President. The same thing happens with the Congress. They know that if they will try to reduce government spending a lot less people will vote for them next time.

Recently, the deficits have become an important issue for the U.S. economy. So, in this case it would be immensely inappropriate to reduce taxes or increase government spending because this will lead to a greater deficit. For this reason economists believe that fiscal policy can not be used today to influence the U.S. economy. Another aspect that place an important role about fiscal policy is timing. Very often it takes a long time to pass a law about increasing or decreasing of taxes or spending. The economy changes much faster than that. It can happen that after passing a law it becomes inappropriate because the economy has already changed.

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