Macroeconomic approach

FISCAL POLICY

WHAT IS FISCAL POLICY?

•

Changes in government spending
or taxes to alter the economy

INFLUENCE

•

Aggregate demand and the level of
economic activity

•

The pattern of resource allocation

•

The distribution of income

EXAMPLES OF EXPANSIONARY

FISCAL POLICY

•

Increase government spending

•

Decrease taxes

•

Increase government spending and
decrease taxes equally

BUDGET DEFICIT

•

When government spending

>

government

revenues

EXAMPLES OF CONTRACTIONARY

FISCAL POLICY

•

Decrease government spending

•

Increase taxes

•

Decrease government spending
and increase taxes equally

BUDGET SURPLUS

•

When government revenues

>

government

spending

WHAT IS THE PURPOSE OF

FISCAL POLICY?

•

Economic long-run growth in output

•

Full employment

•

Price stability

TWO SIDES OF FISCAL POLICY

•

Supply-side fiscal policy

•

Demand-side fiscal policy

WILL AN INCREASE IN TAXES

LEAD TO HIGHER GOVERNMENT

REVENUE?

•

Laffer curve – increasing taxes from
zero will increase tax revenues up
to a certain point

WHY DOES THE SHRINKAGE

HAPPEN?

•

Less incentive to work

•

Shadow economy

•

Less incentive to invest

•

Tax havens

SUCCESFUL IMPLEMENTATION OF

THE IDEA

•

1925, USA – decreasing PIT from 73% to
25%

•

Government revenues
1921: 719 milions USD
1925: 1 bilion USD

•

+redistribution effect

REAGANOMICS

•

Economic Recovery Tax Act of 1981

•

Top marginal rate of tax: 70% ->
31%

•

Revenue:
885 billion (1980)
1,9 trillion (1990)

END