The Tools of Fiscal Policy

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The Tools of Fiscal Policy
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When is the Fiscal Year?

• October 1 to September 30.
• FY2009 will begin this coming Oct. 1.

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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 Presidents budget. In January or
  February, the President sends his budget to
  Congress.

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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.

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3 Types of Federal Budgets(a comparison of
revenue and spending)

• Balanced Budget
• Revenue and Spending are equal
• Surplus Budget
• Revenue is greater than Spending
• Deficit Budget
• Revenue is less than Spending

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• Budget Explorer The Complete US Federal Budget

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• Budget of the United States Government Browse
  Fiscal Year 2008

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• U.S. National Debt

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Fiscal Policy

• Conducted by the Government
• Congress the President
• (Monetary Policy is conducted by the ___.)
• FED

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Fiscal Policy Toolbox

• What tools does the government
• have to regulate the economy?
• Tax policies
• Spending programs
• Who implements fiscal policy?
• President/Congress

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2 main tools of fiscal policy are

• TAXES
• Tax rates
• Income, corporate, excise, FICA
• Tax incentives
• GOVT SPENDING
• Public goods, defense, social programs, etc.

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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?

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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

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III. Fiscal Policy and Inflation

• a. Increase Taxes
• b. Reduce Government Spending
• c. This will move the federal budget towards a
  surplus budget

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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

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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

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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

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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.

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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.

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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

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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