Upload
vuongque
View
217
Download
0
Embed Size (px)
Citation preview
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 1
FISCAL POLICY
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 2
In this chapter you will learn
9.1 What fiscal policy is and what it is used for
9.2 About the economy’s built-in stabilizers
9.3 The problems, criticisms, and complications of fiscal policy
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 3
Chapter 9 Topics
9.1 Fiscal Policy & the AD-AS Model
9.2 Built-In Stabilization
9.3 Problems, Criticisms & Complications
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 4
Fiscal Policy & the AD-AS Model
Since 1945, fiscal policy has been one of the government’s main stabilization policy tools
“active” if changes in government spending or taxes are at the option of the government
“non-discretionary” if independent of parliamentary action
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 5
used when recession occurs
Options:
Increased Government Spending
Tax Reductions
Combined Government Spending Increases & Tax Reductions
may create a budget deficit
Expansionary Fiscal Policy
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 6
AS
AD0
Pri
ce level
Real GDP (billions)
P0
GDPfGDP0recessionary
gap
Expansionary Fiscal PolicyFigure 9-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 7
AS
AD0
Pri
ce level
Real GDP (billions)
P0
GDPfGDP0
P1
AD1
Expansionary Fiscal PolicyFigure 9-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 8
used to combat demand-pull inflation
Options:
Decreased Government Spending
Increased Taxes
Combined Government Spending Decreases & Tax Increases
Contractionary Fiscal Policy
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 9Real GDP (billions)
AS
GDPf
AD3
P3
Pri
ce level
GDP3
inflationary
gap
Figure 9-2
Contractionary Fiscal Policy
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 10Real GDP (billions)
AS
AD3
P2
AD2
Pri
ce level
Contractionary Fiscal Policy
P3
Figure 9-2
GDPf
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 11
Policy Options: G or T?
depends on political views about size of government
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 12
Chapter 9 Topics
9.1 Fiscal Policy & the AD-AS Model
9.2 Built-In Stabilization
9.3 Problems, Criticisms & Complications
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 13
Built-In Stabilization
net tax revenues vary directly with GDP
– taxes rise when GDP rises, & vice versa
– transfer payments fall when GDP rises, & vice versa
leads to automatic stabilization over the business cycle
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 14
A structure of taxation & spending that:
– increases the deficit (reduces the surplus) during recession
– increases the surplus (reduces the deficit) during inflation
Automatic or Built-In Stabilizers
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 15
G,T T = Net Taxes
G (assumed
constant)
GDP2GDP1
T1
Figure 9-3
Deficit {
Built-In Stability
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 16
G,T T
G
GDP2 GDP3
SurplusT2
Figure 9-3
Built-In Stability
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 17
the stabilizers will automatically restrain economic expansion & cushion economic contraction
Economic Importance
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 18
The built-in stability depends on:
Tax Progressivity
– Progressive
– Proportional
– Regressive
The more progressive the tax system, the greater the economy’s built-in stability
Tax Progressivity
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 19
Evaluating Fiscal Policy
to evaluate fiscal policy stance, must
– adjust deficits & surpluses to eliminate automatic changes in tax revenues
– compare adjusted budgets to GDP
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 20
Cyclically Adjusted Budget
the cyclically adjusted budget shows what the budget balance would be if the economy were operating at full employment
500
real GDP
G, TT
G
GDP1
(year 1)
450
GDP2
(year 2)
full-employment
GDP
the cyclically
adjusted deficit is
zero in year 1 at
GDP1
it is also zero in
year 2 at GDP2
the deficit is a by-
product of the
recession
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 21
Figure 9-4
500
475
450
425
G, T
real GDP
G
T1
T2
GDP3
(year 3)
GDP4
(year 4)
the cyclically adjusted
deficit is zero in year 3
taxes are reduced
full-employment
GDP
Figure 9-4
$50 billion deficit
due to recession
$25 billion deficit due
to expansionary fiscal
policy
economy enters a
recession in year 4
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 22
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 23
Recent Canadian Fiscal Policy
neutral to mildly expansionary in the early 1990s
contractionary in later years
actual deficits have given way to actual surpluses
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 24
Federal Deficits (-) & Surpluses (+) as % of GDP
Year Actual deficit or surplus Cyclically adjusted deficit or surplus
1991 -5.4 -4.6
1992 -5.1 -3.9
1993 -5.5 -4.4
1994 -4.6 -4.2
1995 -3.9 -3.6
1996 -2.0 -1.4
1997 +0.7 +1.1
1998 +0.8 +1.1
1999 +0.8 +0.7
2000 +1.7 +1.5
2001 +1.0 +1.3
Table 9-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 25
Chapter 9 Topics
9.1 Fiscal Policy & the AD-AS Model
9.2 Built-In Stabilization
9.3 Problems, Criticisms & Complications
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 26
Problems of Timing– Recognition Lag
– Administration Lag
– Operational Lag
Political Considerations
Expectations of Reversals
Offsetting Provincial & Municipal Finance
Problems, Criticisms, & Complications
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 27
Crowding-Out Effect
expansionary fiscal policy
higher interest rates
reduction in interest-sensitive spending
may not be significant in a recession
fiscal policy can be accommodated by increases in money supply
Problems, Criticisms, & Complications
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 28
some portion of the potential effect of expansionary fiscal policy may be dissipated in the form of inflation
illustrated…
Problems, Criticisms, & Complications
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 29
AD0
AS
P0
Pri
ce level
Figure 9-5
Fiscal Policy
Real GDP (billions)
AD1
GDP0 GDPf
P1
GDP1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 30
AD0
AS
P0
Pri
ce level
Figure 9-5
Fiscal Policy
Real GDP (billions)
AD1
GDP0 GDPf
P1
GDP1
price level rises
GDP increases
only to GDP1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 31
Fiscal Policy in the Open Economy
Shocks Originating from Abroad
Net Export Effect…
recession
expansionary fiscal policy
higher domestic interest rates
increased foreign demand for C$
C$ appreciates
net exports decline
partial offset to expansionary fiscal policy
Table 9-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 32
inflation
contractionary fiscal policy
lower domestic interest rates
decreased foreign demand for C$
C$ depreciates
net exports increase
partial offset to contractionary fiscal policy
Table 9-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 33
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 9 34
Current Thinking on Fiscal Policy
most economists believe fiscal policy is a useful policy lever
– not for “fine-tuning”
– major discretionary fiscal policy should be held in reserve
– should be evaluated for impact on long-run productivity growth