Fiscal policy of the state economy. Fiscal policy and its types. The concept of fiscal policy
Lecture No. 11
1. Fiscal policy: essence and main functions
2. Fiscal policy multipliers
1. fiscal policy- a set of state methods in the field of taxation and public spending aimed at ensuring employment in the equilibrium balance of payments and economic growth in the context of the production of non-inflationary GDP.
Main functions of fiscal policy:
Influence on the state of the economic situation
Redistribution of national income
Accumulation of the necessary resources to finance government programs
Maintaining a high level of employment, etc.
Government revenues are monetary relations that develop between the state, legal entities and individuals in the process of collecting and accumulating a part of the value of GDP in the national fund for the purpose of their further use for the state to perform its functions.
Source of government income:
The state's own revenues from productivity and other activities
Payments for resources that, according to the current legislation, are owned by the state
Official transfers from abroad and others
Fiscal policy includes only such manipulations with the state budget that do not change the amount of money in circulation.
taxes- financial relations between the state and payers in order to create nationwide funds of funds necessary for the state to perform its functions.
Tax policy- the activities of the state in the field of legal regulation and organization of tax payments to the relevant funds.
Tax system- a set of taxes and mandatory payments legally established in the country to replenish the revenue side of the budget.
Tax functions:
distribution
fiscal
Regulatory
Types of taxes:
I. Direct - collected directly from property owners and income recipients.
1) real: a) land
b) on the share of ownership
c) for securities
2) personal: a) on profit from the population
b) corporate profits
c) capital gains
d) from inheritance and donation (5%)
e) property taxes
II. Indirect - levied in the sphere of sale or consumption of goods, that is, they are shifted to the shoulders of consumers of products.
1) fiscal monopoly: a) individual
b) universal (value added tax)
2) excises on certain types of goods
3) duties: a) export-import
b) protectionist
c) fiscal
d) anti-dumping
e) ad valorem
e) mixed
- the legally established amount of tax per unit of taxation.
Growth in tax revenue
Income Growth
Types of tax systems:
· Progressive
Regressive
proportional
The Laffer curve shows at what tax rate tax revenues are maximized. With a further increase in the rate, the incentives for the proposed activity are reduced, production is reduced and the receipts to the state budget are reduced.
Government spending- these are relations regarding the distribution and use of centralized and decentralized funds of monetary resources in order to finance the nationwide needs of socio-economic development.
Government spending is divided into:
1) Current:
A) consumption in the public sector
b) the cost of paying interest on debt
c) transfers
2) Capital investments:
a) public investment
The formation of budget expenditures in Ukraine in modern conditions is influenced by:
The economic risk that causes:
Increase in payments for social protection of the population
Increasing taxes on public sector bailouts from bankruptcies rather than innovation
Increasing taxes to support the social sphere
An increase in monetized public debt, which causes:
Increasing taxes to cover the public debt
Displacement of investments from the sphere of production
· An increase in non-monetized public debt, which causes the allocation of funds to cover arrears arising in previous years on wages to budget workers, scholarships and other types of social payments.
· Budget deficit at all levels, which provides for a strict regime of cost savings, reduction of expenditures in all items of estimates for the maintenance of the administrative apparatus.
· Attracting external resources to cover the budget deficit, which leads to an increase in interest payments.
The change in tax revenues (T) has a multiplicative effect on the equilibrium level of income. If tax revenues are reduced by - this means that the final use income will increase by. Consumer costs (C) will accordingly increase by an amount equal to , which will shift the planned cost curve and increase the equilibrium output c by by an amount equal to . 
Mt = 
(if tax rate is given)
Mt = 
(open economy)
Where is the increase in national income
C/ - marginal propensity to consume
T - tax rate
Z is the marginal propensity to import
Mt is a tax multiplier showing that a decrease in taxes by a certain amount will cause an increase in ND by an even larger amount and vice versa.
If taxes increase by the same amount as government spending, that is 
, then the equilibrium output increases. In this case, one speaks of a balanced budget multiplier, which is always<= 1.
If government spending increases by , then the planned cost curve AD1 shifts up by the same amount, and the equilibrium output increases from Y1 to Y2 by .
, where MG is the government spending multiplier, which shows how much total revenues have changed with a change in government spending by 1 hryvnia, it is calculated by the formula:
1) in a closed economy MG =
2) in a closed economy, at a given tax rate
MG= 
3) in an open economy MG = 
3. Automatic stabilizers and discretionary fiscal policy
Non-discretionary (automatic) fiscal policy is based on the action of built-in stabilizers that provide a natural adjustment of the economy to the phases of the business environment.
Automatic stabilizers- These are such tax and budgetary mechanisms, the actions of which are characterized by a constant focus on mitigating economic fluctuations.
Automatic stabilizers include:
Automatic change in tax revenues at progressive tax rates
Unemployment assistance and various types of social transfers
In a non-discretionary fiscal policy, the budget deficit or surplus is created by the automatic stabilizers themselves.
Discretionary fiscal policy- a policy in which the government deliberately manipulates government spending and taxes in order to change the real volume of national production, control inflation and accelerate economic growth.
The main instruments of discretionary fiscal policy:
Changes in public programs and other programs related to production costs
・Change transport type programs
· Cyclical changes in tax rates
Discretionary policy in order to stimulate blood pressure during the crisis provides for the conscious drawing up of the state budget with a deficit.
4. State budget and restrictions. State debt
Budget- monetary expression of a balanced estimate of income and expenditure of the state for a certain period.
The actual budget is equal to the structural plus the cyclical.
The actual budget displays the real receipts, expenditures and deficit for a certain period.
The structural budget reflects what revenues, expenditures, and deficits should be if the economy is operating at potential GNP.
The cyclical budget shows the impact of the business cycle on the budget and measures the change in revenues, expenditures, and deficits that result from the economy not operating at potential output, but in a state of growth or contraction.
The budget can be:
Normal
In short supply
Surplus
budget policy- the policy of changing state revenues and expenditures to maintain market equilibrium and stimulate the development of certain areas of the national economy.
Concepts of budget policy:
1) annually balanced budget (positive or zero balance at the end of each year)
2) cyclically balanced budget (balancing the budget not for a year, but for the period of the economic cycle)
3) balancing functional finance (balancing not the budget, but the economy as a whole)
Reasons for the budget deficit:
decrease in income in the conditions of the crisis state of the economy
Decrease in the growth of ND
increase in budget costs
inconsistent financial and economic policy
large public sector
increase in public debt service costs
Methods for reducing the budget deficit:
Conversion
Transition from financing to lending
Elimination of subsidies to unprofitable enterprises
Reducing Management Costs
Reforming the taxation system
Increasing the role of local budgets
Types of budget deficit:
1) According to the form of manifestation
a) open (officially recognized in the law on the budget for the corresponding year)
b) hidden (occurs as a result of an overestimation of the volume of planned expenditures and the inclusion of sources of covering the budget deficit in income)
2) For reasons of occurrence
a) forced (due to a reduction in GDP and limited financial resources of the country)
b) conscious (arising as a result of discretionary policy)
3) In the direction of budget financing
a) active (characterized by the direction of funds for investing in the economy, which contributes to GDP growth)
b) passive (characterized by the direction of funds to cover current expenses)
Reasons for the budget deficit in Ukraine:
increase in payments on public debt
Significant amount of social transfer payments
· tax avoidance
Significant management costs
Sources of covering the budget deficit:
1) government loans
2) treasury bills
3) tightening taxation
4) money issue
5) international loans
State debt- the accumulated amount of funds borrowed by the government to finance the budget deficit.
The public debt consists of:
1) debt on issued and outstanding domestic government loans - domestic debt.
2) The financial obligations of the country in relation to foreign creditors on a certain date - external debt.
Domestic debt is divided into:
Monetized - consisting of debts mediated by credit relations between the state and banks.
Not monetized - consisting of unfulfilled obligations by the state with the population or business entities.
The terms of payment are:
Current - the due date for which is due in the current year.
Capital debt is debt that has not yet come due.
Causes of public debt:
Chronic deficit of the state budget
Exceeding the growth rate of government spending over government revenue
Discretionary fiscal policy aimed at reducing the tax burden
Attracting funds from non-residents in order to maintain the stability of the national currency
The action of autonomous stabilizers
Depending on the nature of the impact of public debt on the economy, it can be short-term (“crowding out effect”) and long-term, associated with the accumulation of capital and the consumption of future generations.
Consequences of public debt:
Reducing consumption by the population of the country
Crowding out of private capital and limiting the further development of the economy
Increasing taxes to serve the state budget
Redistribution of income in favor of the owners of government bonds
Public debt management- this is a set of state methods related to studying the market situation, issuing new loans with the payment of interest on loans, performing conversions (changing the conditions of profitability), consolidating (changing the loan term), determining interest rates on a government loan, as well as repaying earlier issued loans that are already due.
Refinancing of the public debt is the issuance of new loans in order to pay off the owners of the bonds of previous loans.
Fiscal policy of the state - 5.0 out of 5 based on 1 vote
fiscal policy
One of the possible expected outcomes of fiscal policy is that aggregate demand increases, leading to an economic recovery
Fiscal (fiscal) policy(English) fiscal policy) - government policy, one of the main methods of state intervention in the economy in order to reduce fluctuations in business cycles and ensure a stable economic system in the short term. The main instruments of fiscal policy are the revenues and expenditures of the state budget, that is: taxes, transfers and government purchases of goods and services. Fiscal policy in the country is carried out by the government of the state.
Main objectives of fiscal policy
Fiscal policy, in addition to monetary policy, is an extremely important component of the work of the state as a distributor in the economy. As an instrument of government, fiscal policy has several purposes. The first goal is to stabilize the level of gross domestic product and, accordingly, aggregate demand. Then, the state needs to maintain macroeconomic balance, which can only be successful if all resources in the economy are effectively used. As a result, along with the smoothing of the parameters of the state budget, the general price level also stabilizes. Both aggregate demand and aggregate supply fall under the influence of fiscal policy.
Impact of fiscal policy
For aggregate demand
The main parameters of fiscal policy are public procurement (ref. G), taxes (ref. Tx) and transfers (ref. Tr). The difference between taxes and transfers is called net taxes(designation T). All these variables are included in aggregate demand (ref. AD) :
Consumer spending ( C) are divided into two groups: autonomous from household income and constituting a certain share of disposable income ( Yd). The latter depend on limit for consumption(designation mpc), that is, how much the cost increases for each additional unit of income. In this way,
, whereAt the same time, disposable income is the difference between total output and net taxes:
It follows that taxes, transfers, and government purchases are aggregate demand variables:
Therefore, it is obvious that when any parameter of fiscal policy changes, the entire aggregate demand function changes. The impact of these tools can also be expressed using economic multipliers.
For the total offer
The offer of all goods and services provide firms, important macroeconomic agents. Aggregate supply is affected by taxes and transfers; government spending has little effect on supply. Firms accept taxes as a regular cost per unit of output, which forces them to reduce the supply of their product. Transfers, on the other hand, are welcomed by entrepreneurs because they can increase the supply of services they provide. When a large number of firms pursue the same policy of supplying goods, the aggregate supply of the entire economy under consideration changes. Thus, the state can influence the state of the economy through the correct introduction of taxes and transfers.
Fiscal policy and the state of the country's economy
Business cycles in macroeconomics
Abstract image of business cycles in the economy
In any economic system, cyclical fluctuations can be distinguished: ups and downs in the economy caused by shocks to aggregate demand and aggregate supply and called business cycles, economic or business cycles. The phases of business cycles are rise, "peak", recession (or recession) and "bottom", that is, crisis. The deepest recession is called depression. Often such fluctuations in business activity are unpredictable and irregular. There are also business cycles of different periods, frequency and size. The reasons for such cycles can be very different: from wars, revolutions, the technological process and investor behavior to, for example, the number of magnetic storms per year and the rationality of macroeconomic agents. In general, such unstable behavior of the economy is explained by the constant imbalance between aggregate supply and demand, total spending and production volumes. The business cycle theory gained a lot of popularity thanks to the American economist William Nordhaus. Great contributions to the development of business cycle theory have been made by people such as Robert Lucas, the Norwegian economist Finn Kydland, and the American Edward Prescott.
As a rule, the policy of the state depends on the state of the economy of a given country, that is, on what phase of the cycle the country is in: recovery or recession. If the country is in recession, then the authorities spend stimulating economic policy to bring the country out of the bottom. If a country is experiencing an upturn, then the government spends contractionary economic policy in order to prevent high rates of inflation in the country.
Stimulating policy
If the country is experiencing a depression or is in the stage of an economic crisis, then the state may decide to conduct stimulating fiscal policy. In this case, the government needs to stimulate either aggregate demand, or supply, or both. To do this, other things being equal, the government increases its purchases of goods and services, reduces taxes, and increases transfers, if possible. Any of these changes will lead to an increase in aggregate output, which automatically increases aggregate demand and the parameters of the system of national accounts. Stimulating fiscal policy leads to an increase in output in most cases.
Restraining policy
The authorities are conducting contractionary fiscal policy in the event of a short-term "overheating of the economy". In this case, the government takes measures that are directly opposite to those carried out under stimulating economic policy. The government cuts its spending and transfers and increases taxes, reducing both aggregate demand and possibly aggregate supply. Such a policy is regularly carried out by the governments of a number of countries in order to slow down the rate of inflation or avoid its high rates in the event of an economic boom.
Automatic and discretionary
Economists also divide fiscal policy into the next two types: discretionary And automatic. Discretionary policy is officially announced by the state. At the same time, the state changes the values of fiscal policy parameters: government purchases increase or decrease, the tax rate, the size of transfer payments, and similar variables change. By automatic policy is understood the work of "built-in stabilizers". These stabilizers are such as the percentage of income tax, indirect taxes, various transfer benefits. The amount of payments is automatically changed in case of any situation in the economy. For example, a housewife who lost her fortune during the war will pay the same percentage, but from a lower income, therefore, the taxes for her automatically decreased.
Fiscal policy shortcomings
Crowding out effect
This effect, also known as crowding out effect manifests itself with an increase in government purchases of goods and services in order to stimulate the economy. Recognized as a major shortcoming of fiscal policy by many economists, especially exponents of monetarism. When government increases its spending, he needs money in the financial market. Thus, in the loan market growing demand for money. This causes banks to raise prices for their loans, i.e. increase their interest rate for reasons such as a profit maximization motive or simply a lack of money to lend out. An increase in the interest rate is not liked by investors and entrepreneurs of firms, especially start-ups, when the company does not have its own "starting" money capital. As a result, due to high interest rates, investors have to take out less and less loans, which leads to decrease in investments in the country's economy. Thus, stimulating fiscal policy is not always effective, especially if the country does not develop business of any kind properly. The effect of "Crowding-in" is also possible, that is, an increase in investment due to a reduction in government spending.
Other disadvantages
Notes
- David N. Weil Fiscal Policy // The Concise Encyclopedia of Economics: Article.
- Yandex. Dictionaries. "Defining Fiscal Policy"
- Matveeva T. Yu. 12.1 Goals and instruments of fiscal policy // Introduction to macroeconomics. - "Publishing House of the State University-Higher School of Economics", 2007. - P. 446 - 447. - 511 p. - 3000 copies. - ISBN 978-5-7598-0611-0
- Grady, P. Fiscal Policy // The Canadian Encyclopedia: Article.
- Matveeva T. Yu. Course of lectures on macroeconomics for ICEF. - "Publishing House of the State University-Higher School of Economics", 2004. - P. 247 - 251. - 444 p.
- Matveeva T. Yu. 4.4 The economic cycle, its phases, causes and indicators // Introduction to macroeconomics. - "Publishing House of the State University-Higher School of Economics", 2007. - P. 216 - 219. - 511 p. - 3000 copies. - ISBN 978-5-7598-0611-0
- Oleg Zamulin, "Real business cycles: their role in the history of macroeconomic thought."
- "Yandex. Dictionaries, Definition of business cycles
- Harper College Material"Fiscal Policy" (English): Lecture.
- Investopedia"Definition of Crowding-out Effect" (English): Article.
- Edge, K."Fiscal Policy and Budget Outcomes" (English): Article.
- Matveeva T. Yu. 12.3 Types of fiscal policy // Introduction to macroeconomics. - "Publishing House of the State University-Higher School of Economics", 2007. - P. 458-459. - 511 p. - 3000 copies. - ISBN 978-5-7598-0611-0
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Regulation by the government of business activity through measures in the field of budget management, taxes and other financial opportunities. There are two types of fiscal policy: discretionary and automatic. Fiscal policy… … Financial vocabulary
Introduction
The fiscal policy of the state is an important direction of its financial policy, which plays an important role in regulating the economy through taxes and the policy of income and expenditure.
Fiscal policy is one of the main instruments of state regulation of the economy. Some economists argue that, like the atomic bomb, it is too powerful a weapon to be allowed to be played with by individuals and governments; so it would be better if fiscal policy never applied.
Every government always has some kind of fiscal policy, whether it realizes it or not. The real question is whether this policy will be constructive or whether it will be unconscious and inconsistent.
This topic is very relevant today, since Russia, like many other countries, is in the conditions of the global financial crisis. The country's economy is going through far from the best days, and the fate of every person living in our country and the fate of the whole country as a whole depends on how the government implements fiscal policy.
The purpose of this course work is to consider fiscal policy.
To achieve the goal, it is necessary to solve the following tasks:
Define the concept and mechanism of action of fiscal policy;
To study taxes, government spending and their role in regulating national production;
Consider discretionary and non-discretionary fiscal policy.
The concept and mechanism of action of fiscal policy
Fiscal policy -- the government's policy in the field of taxation, public spending, the state budget, aimed at providing employment to the population and preventing, suppressing inflationary processes. It is a core part of the financial policy and an integral part of the economic policy of the state
Fiscal policy pursues the following goals:
elimination of unemployment;
fight against inflation;
stabilization of economic development;
counter-cyclical regulation of the economy;
stimulation of economic growth;
achievement of foreign trade balance.
Depending on the situation in the economy, there are two main areas of fiscal policy:
Stimulating fiscal policy;
Restraining fiscal policy.
During the economic downturn, the government pursues an expansionary fiscal policy. It includes: increasing government spending or reducing taxes, or a combination of these measures. In other words, if there is a balanced budget at the starting point, fiscal policy should move in the direction of the federal budget deficit during a recession or depression. Conversely, if there is inflation caused by excess demand in the economy, this is a contractionary fiscal policy. A contractionary fiscal policy includes: reducing government spending, or increasing taxes, or a combination of both. Fiscal policy should be guided by a positive balance of the federal budget if the economy faces the problem of controlling inflation.
Modern fiscal policy determines the main directions for the use of the state's financial resources, methods of financing and the main sources of replenishment of the treasury. Depending on the specific historical conditions in individual countries, such a policy has its own characteristics. However, a common set of measures is used. It includes direct and indirect financial methods of economic regulation.
Direct methods include methods of budgetary regulation. The state budget finances:
expenses for expanded reproduction;
unproductive expenses of the state;
development of infrastructure, scientific research, etc.;
carrying out structural policy;
With the help of indirect methods, the state influences the financial capabilities of producers of goods and services and the size of consumer demand. The taxation system plays an important role here. By changing tax rates for various types of income, providing tax incentives, reducing the non-taxable minimum income, etc., the state seeks to achieve perhaps more sustainable economic growth rates and avoid sharp ups and downs in production.
Accelerated depreciation policies are among the important indirect methods that promote capital accumulation. In essence, the state exempts entrepreneurs from paying taxes on part of the profits artificially redistributed to the depreciation fund.
Depending on the nature of the use of direct and indirect financial methods, economic science distinguishes between two types of state fiscal policy. The first is discretionary policy, which is carried out at the discretion of the government and on the basis of its decisions; the second is the so-called policy of built-in stabilizers, that is, those mechanisms that operate in the mode of self-regulation and, regardless of the decisions made, themselves react to changes in the situation in the economy.
With the help of fiscal policy, the state can directly influence the development of the economy, achieving its sustainable growth, price stability and full employment of the able-bodied population.
Such a policy consists in foreseeing in time a decline in production and an increase in unemployment, as well as an increase in inflationary processes in the economy, and to influence them accordingly. With the coming downturn in output, the government increases government spending and cuts taxes in order to increase aggregate spending and investment. Thus it promotes the rise of production and employment. On the contrary, when inflation occurs, government spending decreases and taxes increase.
The principle of self-regulation underlies the built-in stabilizers, similar to the principle on which the autopilot or refrigerator thermostat is built. When the autopilot is on, it maintains the aircraft's heading automatically based on incoming feedback. Any deviation from the set course due to such signals will be corrected by the control device. Similarly, economic stabilizers work, thanks to which automatic changes in tax revenues are carried out; payment of social benefits, in particular for unemployment; various government programs to help the population, etc.
How does the self-regulation, or automatic change, of tax revenues take place? A progressive tax system is built into the economic system, which determines the tax depending on income. As income increases, tax rates progressively increase, which are approved by the government in advance. With an increase or decrease in income, taxes are automatically raised or lowered without any intervention by the government and its governing and control bodies. Such a built-in stabilization system of levying taxes is quite sensitive to changes in the economic situation: during periods of recession and depression, when the incomes of the population and enterprises fall, tax revenues automatically decrease as well. On the contrary, during inflation and boom periods, nominal income rises, and therefore taxes automatically increase.
In the economic literature, there are different points of view on this issue. A hundred years ago, many economists spoke in favor of the stability of tax collections, because, in their opinion, it contributes to the stability of the economic situation of society. At present, there are many economists who hold the opposite point of view and even declare that the objective principles underlying the built-in stabilizers should be preferred to the incompetent intervention of state authorities, which are often guided by subjective opinions, inclinations and preferences. At the same time, there is also an opinion that one cannot fully rely on automatic stabilizers, since in certain situations they may respond inadequately to the latter, and therefore need to be regulated by the state.
Payments of social assistance benefits to the unemployed, the poor, families with many children, veterans and other categories of citizens, as well as the state program to support farmers, the agro-industrial complex are also carried out on the basis of built-in stabilizers, because most of these payments are realized through taxes. And taxes, as you know, grow progressively along with the incomes of the population and enterprises. The higher these incomes, the more tax deductions to the fund to help the unemployed, pensioners, the poor and other categories in need of state assistance are made by enterprises and their employees.
Despite the significant role of built-in stabilizers, they cannot completely overcome any fluctuations in the economy. Just as a real pilot comes to the aid of an autopilot in difficult situations, so in case of significant fluctuations in the economic system, more powerful government regulators are involved in the form of discretionary fiscal as well as monetary policy.
Another important element is the change in tax rates. When a short decline in production is predicted, decisions to reduce tax rates appear in addition to built-in stabilizers. Although the progressive taxation system makes it possible to automatically change tax revenues to the budget, which will decrease with a decrease in production and income, but this may not be enough to affect the negative situation that has arisen. It is during this period that the need arises to reduce tax rates and increase government spending in order to promote the rise of production and overcome its decline.
Discretionary fiscal policy also provides for additional spending on social needs. Although unemployment benefits, pensions, benefits for the poor and other categories of people in need are regulated using built-in stabilizers (increase or decrease as income-based taxes come in), nevertheless, the government can implement special programs to help these categories of citizens during difficult times of economic development. .
Thus, we come to the conclusion that an effective fiscal policy should be based, on the one hand, on self-regulation mechanisms embedded in the economic system, and, on the other hand, on careful, cautious discretionary regulation of the economic system by the state and its governing bodies. Consequently, the self-organizing regulators of the economy must function in concert with the conscious regulation organized by the state.
However, such regulation is not easy to achieve. Let's start with the fact that it is necessary to predict a recession or inflation in a timely manner, when they have not yet begun. It is hardly advisable to rely on statistical data in such forecasts, since statistics sum up the past, and therefore it is difficult to determine future development trends from it. A more reliable tool for forecasting the future level of GDP is the monthly analysis of leading indicators, which is often referred to by politicians in developed countries. This index contains 11 variables that characterize the current state of the economy, including the average length of the working week, new orders for consumer goods, stock market prices, changes in orders for durable goods, changes in the prices of certain types of raw materials, etc. It is clear that if, for example, there is a shortening of the working week in the manufacturing industry, orders for raw materials decrease, orders for consumer goods decrease, then with a certain probability a decline in production can be expected in the future.
However, it is rather difficult to determine the exact time when the recession will occur. But even in these conditions, it will take a long time before the government takes appropriate measures.
An effective fiscal policy should take into account the real state of the economy, namely, it should be stimulating, i.e. increase government spending and reduce taxes during the emerging decline in production. During the period of inflation that has begun, it should be restraining, i.e. raise taxes and cut government spending.
There are multipliers in fiscal policy: government spending, a balanced budget, and tax multipliers. The essence of the multiplier effect is as follows: an increase in any of the components of autonomous spending leads to an increase in the national income of society, moreover, by a value greater than the initial increase in spending.
The government spending multiplier shows the increase in GNP as a result of the increase in government spending spent on the purchase of goods and services.
The government spending multiplier can also be determined using the marginal propensity to consume MPC. As a result, the government spending multiplier will be equal to:
This means that if the state increases the volume of its expenditures by a certain amount without increasing budget revenue items, then this is exactly the increase in income. Therefore, a change in government spending causes a change in income proportional to the change in spending.
It can be noted that the government spending multiplier is equal to the investment multiplier. From an economic standpoint, this identity is natural. Indeed, if the government creates additional demand for goods by increasing government spending, then this causes an initial increase in GNP equal to the increase in spending. Economic entities that use government appropriations, in turn, having noted an increase in income, increase their consumption at their own marginal propensity to consume, thereby contributing to a further increase in total demand and gross national product, etc.
Thus, a change in the volume of government spending leads to a process of multiplication of national income, identical to that which is carried out with a change in investment. It follows from this that the revenue and expenditure parts of the budget can be under the direct influence and regulation of resources by the state. Unfortunately, the mechanism of this regulation is not well-established, and its implementation in practice encounters many obstacles associated with rising prices, changes in the exchange rate, and the dynamics of loan interest. And yet, this mechanism for the impact of government purchases on output suggests that during a downturn, government purchases can be used to increase output. Conversely, during a boom, the government may reduce its spending levels, thereby reducing aggregate demand and output.
The tax multiplier shows the change in output with an increase in tax collections:
Due to the increase in taxes, consumption decreases by an amount. Due to the investment multiplier, real output will decrease by
Then the tax multiplier is
The minus sign in front of the formula shows that the national income decreases due to the increase in taxes. Accordingly, with a decrease in tax deductions, income increases.
Reducing taxes for consumers leads to an increase in their income and, accordingly, to an increase in their expenses, which is expressed in an increase in demand for consumer goods. Tax cuts for firms lead to higher incomes for entrepreneurs, which stimulates their spending on new investments and leads to an increase in demand for investment goods.
Balanced budget multiplier
It should be taken into account that the collected taxes are used to increase government spending, which leads to a multiplicative increase in output:
As a result, due to the simultaneous increase in government spending and the tax burden, national income changes as follows:
In the case when government spending and tax deductions increase by the same amount, the equilibrium output increases by the same amount. In this case, the balanced budget multiplier is always equal to one:
One can formulate the well-known Haavelmo theorem: an increase in government spending accompanied by an increase in taxes for a balanced budget will cause an increase in income by the same amount.
Thus, the multiplier effect of tax cuts is weaker than that of an increase in government spending, which is algebraically expressed as the excess of the spending multiplier over the tax multiplier by one. This is a consequence of the stronger impact of government spending on income and consumption (compared to changes in taxes). This difference is decisive in the choice of fiscal policy instruments. If it is aimed at expanding the public sector of the economy, then government spending is increased to overcome the cyclical downturn (which has a strong stimulus effect), and taxes are increased to curb inflation (which is a relatively mild restrictive measure).
Taxes, government spending and their role in regulating national production
Fiscal policy is based on the use of two economic regulators: taxes and government spending. They can be used in various combinations, which gives many options for influencing the real volume of national production and its structure, employment and inflation. Both levers are subordinated to the same goal and are closely related.
The state is recognized to make a stabilizing impact on the economy, providing the best conditions for economic growth. To perform tasks, it must have the necessary resources. In part, they can be found through valuable sources, such as income from state-owned enterprises. However, in a market economy, the main production unit is not a state, but a private enterprise. Therefore, in order to form state resources, the government withdraws part of the income of enterprises and citizens. Withdrawn income, changing the owner, turns into a tax.
Taxes - obligatory payments of individuals and legal entities levied by the state
In modern conditions, taxes perform two main functions: fiscal and economic.
The fiscal function is the main one, characteristic of all states. With its help, state funds and material conditions for the functioning of the state are created.
The economic function means that taxes, as an active participant in redistributive relations, have a serious impact on reproduction, stimulating or restraining its pace, strengthening or weakening capital accumulation, expanding or reducing the effective demand of the population. The expansion of the tax method in mobilizing the national income for the state causes constant contact between the state and the participants in production, which provides it with real opportunities to influence the economy, at all stages of the reproduction process.
In modern conditions, in connection with the expansion of the social functions of the state, contributions to the social insurance fund have become widespread. In their essence, they are targeted taxes, since they have a specific purpose.
Depending on the body that collects the tax and manages its amount, there are state and local taxes. State taxes are collected by the central government on the basis of state legislation and directed to the state budget. These include income tax, corporate income tax, customs duties, etc. Local taxes are collected by local authorities in the respective territory and go to the local budget. Local authorities levy mainly individual excises and property taxes.
Taxes on their use are divided into general, they go to the single cash desk of the state, and special (target) (for example, the tax on the sale of gasoline, fuel, lubricating oils in the United States is sent to the road fund)
Depending on the nature of the collection of tax rates, taxes are divided into: proportional, progressive and regressive.
A proportional tax is a tax whose rate is the same for all taxable amounts. A tax whose average rate rises as the amount increases is called a progressive tax. A regressive tax involves reducing the percentage of withdrawal from the amount as it grows. The last type of taxes are, as a rule, indirect taxes.
The ratio of different types of taxes at different stages of development of society has changed. In the 19th and early 20th centuries, indirect taxes played the main role; after the Second World War, direct taxes began to play a leading role. The modern tax system is characterized by an increase in contributions to the social insurance fund, which is ahead of both direct and indirect taxes in terms of growth rates.
There are three stages in the development of views on the role of taxes in the implementation of state interests:
in the initial stages of a market economy, taxes were considered solely in fiscal interests as a means of replenishing the state treasury
then they came to the conclusion that it was necessary to introduce restrictions on the fiscal function of taxation. Such a limitation was the requirement not to undermine the reproductive process in the micro economy.
for the present time has become characteristic of the desire to increasingly use taxes to adjust the economic proportions in society
In developed countries, this area of tax policy has been more widely developed. It is believed that taxes should not extinguish the desire of the manufacturer to increase output. This will allow him to find and calculate the area of positive economies of scale in which it is possible to obtain the greatest return on invested capital. In this case, not only the incomes of the entrepreneur increase, but also the state, whose treasury will be replenished with additional resources, because the increased incomes allow increasing the amount of taxes collected.
The next step in the development of the concept of taxation is connected with the understanding that the manipulation of tax rates, linking taxes with the use of resources turns them into a powerful regulator of economic proportions. For example, the introduction of payment for resources (land, clean water, etc.) helps to save resources in economic activities. Payments for land usually lead to an increase in the height of industrial buildings. Reducing tax rates or introducing an accelerated depreciation regime stimulates production growth. The tightening of tax rates slows it down.
In the second half of the XX century. taxes are actively used as a regulator of the general equilibrium of the market economy. In particular, such use of taxes is envisaged in numerous anti-cyclical programs. These programs assign different roles to taxes as regulators of the economy, depending on the concept that guides the government.
According to Keynes, taxes are lowered during a recession to stimulate production. During the recovery, on the contrary, taxes increase, which makes it possible to slow down the growth of investments, preventing the economy from overheating by growing disproportions. The growth of tax revenues during the recovery will allow to pay off the public debt, which was formed during the depression period to finance government spending.
According to the theory of monetarists and the concept of economics, the proposal to reduce taxes becomes a significant incentive for efficient production. M. Friedman, the ideologist of the monetary school, recommends reducing the tax burden when the economic crisis passes its lowest point and leaves only efficient producers on the market, ruining the rest. In this case, lower tax rates for strong producers will provide them with greater investment opportunities and allow the country to move to a higher level of production efficiency.
Supply theory recommends maintaining a competitive regime by easing the tax burden, up to the application of tax holidays for small businesses, or for those who produce goods that are most in the public interest.
The modern tax system includes various types of taxes. Their main group is made up of direct and indirect taxes.
Direct taxes are imposed directly on income or property.
Indirect taxes are taxes on goods and services paid in the price of the goods or included in the tariff. The owner of the goods or services, when they are sold, receives tax amounts, which he transfers to the state. In this case, the connection between the payer and the state is mediated through the object of taxation
In the tax field, basic ideas and provisions are applied, which are called the principles of taxation. The economic principles of taxation were first formulated by A. Smith. Currently, they have undergone some changes and can be briefly characterized as follows:
the principle of justice - everyone should take part in financing the state's expenses in proportion to their income and capabilities. The methodological basis is progressive taxation: whoever receives more benefits from the state must pay more taxes;
the principle of proportionality - the balance of interests of the taxpayer and the state budget. This principle is characterized by the Laffer curve, which shows the dependence of the tax base on changes in tax rates, as well as the dependence of budget revenues on the tax burden;
the principle of taking into account the interests of taxpayers is the simplicity of calculating and paying taxes. Revealed via:
certainty principle
convenience principle.
the principle of economy (efficiency) - the need to reduce the costs of the state from the collection of taxes. The amount of fees for a separate tax must exceed the cost of its maintenance.
Over time, the Austrian economist A.G.G. Wagner added the following principles:
sufficiency (ensuring that government expenses are covered by tax revenues in the current and subsequent periods);
correct choice of sources of taxation;
identification of ways to get rid of paying taxes;
the impact of taxes on payers;
generality (coverage of all segments of the population);
progressiveness (increase in the amount of the tax with the growth of the payer's income);
tax exemption for the part of the population that receives the minimum income
Taxes are the main source of covering government spending, the essence and nature of which is revealed in various models of building tax systems, or tax theories.
Public spending is the continuous use by the state of funds from the budget, extra-budgetary funds and own funds of state enterprises, associations and organizations for the purposes and objects defined by the law on the budget, extra-budgetary funds, regulations of the government, ministries and departments and charters of enterprises and organizations
The structure of government spending and their share in the gross national product depend on the stage of social development of the state system, foreign and domestic policy of the state, the general level of the economy, the level of well-being of the population, the size of the public sector in the economy, and traditions.
Government spending, firstly, is caused by the very fact of the existence of the state. Secondly, government spending serves to reproduce the economic and social relations that exist in a particular state at a particular time. Thirdly, the main source of government spending is taxes, which are deductions from earnings and incomes. Fourth, the bulk of government spending is unproductive, since it is the share of national income that is withdrawn from the reproduction process.
Government spending is divided into four main groups:
expenses for social and cultural needs;
spending on the national economy and supporting the economy;
military spending;
management costs.
The listed groups of expenses are determined by subject matter. But government spending can be classified in other ways.
According to their role in the reproduction process, they are divided into expenses for the sphere of material production, expenses for the non-productive sphere, expenses for the creation of state reserves.
According to the intended purpose, public expenditures are divided into:
capital costs - the costs of expanded reproduction and reconstruction;
the current costs of the state - the cost of government, military spending, spending on pensions and benefits, etc.;
expenses for the formation and maintenance of insurance and reserve funds
According to the economic content, public expenditures are divided into the following types: wages, scholarships, pensions and allowances, medicines, food, office expenses, expenses for the purchase of furniture, expenses for current and major repairs, etc.
On a territorial basis, expenditures are divided into national, expenditures of subjects of the federation and local expenditures.
By source, government spending is divided into:
budget allocations;
expenses at the expense of reserve and insurance funds;
credit sources of financing;
self-financing.
State expenditures in the economy are a constant item of expenditure. No matter how significant fluctuations in government spending in the economy within a particular country, the general trend towards stabilization of their level is explained by their structure-forming role. The general purpose of these expenses is to create the most favorable conditions for private entrepreneurial activity.
Discretionary and non-discretionary fiscal policy
The instability of financial systems, the aggravation of social problems and the slowdown in economic growth are forcing the governments of many countries to take various measures to stabilize the situation and stimulate the economy, including fiscal policy measures. As the historical experience of conducting an expansionary economic policy during periods of crises shows, in most cases the main role was played by monetary policy measures due to their greater efficiency and relatively higher efficiency. However, discretionary fiscal policy can also be used, but with some limitations, especially in emerging economies.
It should be noted that built-in, automatic fiscal policy stabilizers are considered relatively effective and, importantly, adequately working both in a recession and in case of overheating of the economy. In Russia, they are quite sensitive to changes in economic conditions, including those outside the country's borders - for example, during a period of economic slowdown in the world, the tax burden on the oil sector is significantly reduced, as energy prices, to which the main fees in the oil sector are tied, are reduced. .
Our country faces the following tasks related to fiscal policy and requiring fairly quick solutions.
The use of monetary and fiscal policy measures to stabilize the situation in the country's financial market. The solution to this problem is mainly provided by monetary policy measures, however, fiscal measures can also be used, especially if there are significant reserves (including oil and gas funds). However, the key question here is: how to determine the optimal measures and the amount of budget funds that would have a positive impact on the financial sector, but would not lead to adverse medium and long-term consequences - inflation, a sharp increase in the budget deficit, etc.?
The use of fiscal policy measures to address acute social problems. In the context of the global financial crisis, economic instability and slowdown in economic growth, while at the same time a fairly high level of inflation, Russia, like other countries, may face various social problems. On the one hand, this is a decrease in the standard of living of citizens, an increase in unemployment, and on the other, a slowdown in the development of social sectors. Here, the choice of stimulating policy measures is important so that only those who really need it receive assistance, and budget expenditures do not lead to an additional increase in inflation.
Support for the real sector of the economy in a possible recession. In order to avoid a sharp decline in the real sector of the economy (due to unfavorable external conditions and internal instability) and the associated economic and social consequences, stimulus measures from the state are needed
When developing anti-crisis programs, it is necessary to take into account the accumulated world experience in dealing with crises. It indicates that assistance should be provided only to those companies and banks that are experiencing temporary difficulties, but remain solvent. Practice proves that the indiscriminate provision of state support to enterprises and banks, regardless of the state of their balance sheets, does not accelerate the recovery from the crisis and does not mitigate its consequences. On the contrary, such a policy increases the losses from the current crisis and increases the likelihood of a new crisis in the future, since it undermines the incentives of economic agents to pursue responsible policies with a realistic assessment of all risks. In addition, the cost of the support provided should be shared between the state and the owners of the rescued companies. If the state takes all the support on itself, it actually unjustifiably transfers taxpayers' funds to company owners.
A separate discussion deserves the issue of increasing the share of state ownership in the financial sector on a global scale. As part of anti-crisis programs, a significant part of it has passed from private owners under state control. By the end of 2008, in most developed countries, governments became the largest owners of financial institutions: they controlled about a quarter of the sector. A legitimate question arises: if the excessive risk appetite of private banks eventually led to a crisis and required emergency measures on the part of the state, should a course be taken to increase its role as a financial intermediary?
Through the change in taxes and government spending, the government influences the development of production and the change in GNP. This impact can be periodic, as needed (discretionary fiscal policy), or permanent, automatic (non-discretionary fiscal policy)
Discretionary fiscal policy is the deliberate manipulation of government spending and taxes to change real national output and employment, control inflation, and boost economic growth. The term "discretionary" means that taxes and government spending are changed at the discretion of the government.
Discretionary policy considers various social programs, the state employment program, changes in tax rates.
The state employment program is one of the measures to combat unemployment and stabilize the economy. This program is being implemented at the expense of the state and local authorities. For example, widespread use in a market economy during the crisis of 1929-1933. found a community service program. Under this program, the state at the expense of budgetary funds organized various types of work for the population on the principle of "just to borrow" - sometimes some dug holes, while others buried them. Therefore, quite often, from the point of view of the economy, these programs were ineffective.
The main task of these programs was to stimulate aggregate demand and relieve social tension in society in the context of a massive increase in unemployment.
Since these programs are quite wasteful, it is much more effective to pursue a regular counter-cyclical policy than to deal with the consequences of the crisis in an inefficient way.
Of course, these employment programs can be modified. Thus, to increase employment, small enterprises can be encouraged to ensure maximum employment in their production. This practice is used in China.
In a normal economic development, the government should have a strategic and clear employment program in order to effectively use it in a recession when people lose their jobs. Employment programs are usually quite flexible. They are very effective in that, unlike public works programs, they are less expensive and can be applied by local authorities in any local market.
Expenditures on social programs include pension payments, various programs to help the poor, spending on education, medicine, etc. These programs help stabilize economic development when people's incomes are reduced. The main disadvantage of all these programs is that they are introduced in a recession and are difficult to cancel when the economy is on the rise.
Changing tax rates, from this point of view, is a more effective tool in an effort to stabilize the economy.
Thus, a cut in income tax rates in the face of a short-term recession can keep revenues from shrinking, thereby preventing the aggravation of crises, increasing consumer spending.
But there is also a drawback here. Temporary tax cuts are not always appropriate to fight a recession, because in a democratic society it is usually harder to raise taxes after a recession, it is much easier to organize political sentiment to fight unemployment than to fight an inflationary gap and overemployment.
An effective discretionary fiscal policy involves a competent diagnosis of ongoing economic processes, on the basis of which the government adjusts its levers: taxes and government spending on the projected economic environment.
However, it is not completely possible to find out what the emerging macroeconomic trends will result in. Therefore, the government cannot always predict the real directions of economic development, which forces it to make decisions on setting up fiscal policy with a certain delay. A time lag is formed between the need to adjust the economic levers of fiscal policy and the adoption of government decisions.
The delay in the action of the necessary levers of discretionary policy is also associated with the usual administrative procedures for organizing events due to the implementation of the new economic policy.
The effect of the adoption of a new fiscal policy usually does not come immediately, because investments in the development of production pay off after a sufficiently long period of time.
The noted delays, time lags between the period when the need for new directions of fiscal policy arises and the expected positive effect from their application are superimposed on each other. This, of course, worsens the ability of discretionary fiscal policy to quickly adjust to ongoing changes in the economy and effectively correct them.
The second type of fiscal policy is non-discretionary, or the policy of automatic (built-in) stabilizers. The limited ability of discretionary fiscal policy to adapt to the needs caused by new economic proportions makes it necessary to supplement it with a different kind of fiscal policy that can continuously adjust tax revenues. This is done automatically by so-called built-in stabilizers.
A "built-in" (automatic) stabilizer is an economic mechanism that makes it possible to reduce the amplitude of cyclical fluctuations in employment and output levels without resorting to frequent changes in the government's economic policy. Such stabilizers in industrialized countries are usually progressive taxation, government transfers (including unemployment insurance), and profit sharing. Built-in stabilizers of the economy relatively mitigate the problem of long time lags in discretionary fiscal policy, as these mechanisms are "turned on" without the direct intervention of parliament.
In the upswing phase, the incomes of firms and the population naturally grow. But with progressive taxation, tax amounts increase even faster. During this period, unemployment is reduced, the welfare of low-income families improves. Consequently, the payment of unemployment benefits and other social expenses of the state are reduced. At the same time, aggregate demand is declining, and this is holding back economic growth.
In the crisis phase, tax revenues automatically decrease, and thus the amount of withdrawals from the income of firms and households decreases. At the same time, social payments, including unemployment benefits, are increasing. This means that the purchasing power of the population is increasing, which helps to overcome the decline in production.
Rice. Figure 1 can serve as a good illustration of how the tax system enhances the stability achieved automatically. Government spending (G) in this scheme is considered constant and independent of the size of GDP. The amount of tax revenue is measured in the same direction as the level of GDP that the economy actually achieves. The direct dependence of tax revenues on the level of GDP is reflected by the ascending line T.
Gross domestic product, GDP.
Figure 1. Automatically achieved stability.
fiscal policy discretionary
economic meaning. The economic meaning of this direct relationship between tax revenues and GDP becomes apparent in the light of two circumstances.
Taxes reduce spending and aggregate demand.
From a stability point of view, spending cuts are desirable when the economy is moving towards inflation, and vice versa, it is desirable to increase spending during periods of a sharp decline in business activity.
In other words, the tax system shown in Fig. 1 provides some stability to the economy by automatically causing changes in tax revenues and hence changes in the government budget that counteract both inflation and unemployment.
As GDP rises during times of prosperity, tax revenue automatically rises and—because it cuts spending—holds back the recovery. In other words, as the economy moves towards a higher level of GDP, tax revenues automatically increase and contribute to the elimination of the budget deficit and the creation of a budget surplus.
If the volume of tax revenues changes in direct proportion to the size of GDP, then the budget deficit, which, as a rule, automatically forms during periods of recession, helps to overcome it. On the contrary, the budget surplus, which automatically arises during periods of economic growth, helps to overcome possible inflation.
On the contrary, when GDP contracts during recessions, tax revenues automatically decrease, leading to increased spending and thus mitigating the economic downturn. That is, with a decrease in the level of GDP, tax revenues also fall and push the state budget from surplus to deficit. From fig. 1 shows that at a low level of national income GDP1, a budget deficit favorable for economic growth is automatically created; and at a high and possibly inflationary level of GDP3, a contractionary fiscal surplus is automatically formed.
Progressive tax system. Rice. Figure 1 clearly demonstrates that the magnitude of automatically occurring budget deficits and surpluses, and hence the stability achieved, depend on the susceptibility of taxes to changes in the level of GDP. If tax revenues are rapidly changing following changes in GDP, then the slope of the T line in the figure will be steep and the vertical segment between T and G, that is, the size of the deficits or surpluses, will be large. If, on the other hand, when the level of GDP changes, tax revenues change very little, then the slope of the line will be gentle, and the stability achieved automatically will be insignificant.
The slope of the T line in fig. 1 depends on the nature of the current tax system. Under a progressive tax system, that is, if the average tax rate (= tax revenue/GDP) rises in proportion to GDP, the slope of the T lines will be greater than under a proportional or regressive system. Under a proportional tax system, the average tax rate remains the same as GDP increases; under a regressive tax system, the average tax rate decreases with GDP growth. Under progressive and proportional tax systems, tax revenues will increase with GDP growth, while under a regressive system, they may increase, decrease, or remain unchanged as GDP grows. But you must understand the following: the more progressive the tax system, the greater the degree of economic stability achieved.
Changes in public policy and legislation that determine the progressiveness of the net tax system (taxes minus transfers and subsidies) affect the degree of stability achieved automatically.
The automati- cally achieved stability, that is, the change in tax revenues in direct proportion to GDP, means that the excess or deficit of the current, or actual, budget in any given year is not indicative of the government's fiscal policy. Here is the proof. Assume that the economy is at full employment at GDPf (Figure 2), and the actual budget deficit is represented by the vertical line ab. Now imagine that investment spending declined, causing output to fall back to the level of GDP. Let's assume that the government does not take any discretionary measures. Therefore, the lines G and T remain in the position shown on the graph. As the economy moves towards GDPr, tax revenues decline and, if government spending remains unchanged, the deficit will increase from ab (= ed) to ec, i.e., by dc. The resulting dc cyclical deficit, so named because it is linked to the business cycle, is not the result of certain counter-cyclical fiscal measures by the government, but rather a by-product of fiscal inaction during the period when the economy was sliding into recession.
Figure 2. Deficit at full employment (structural) and cyclical deficit
The deficit or surplus of the actual budget indicates not only possible discretionary fiscal decisions about spending and taxes (as indicated by the position of the lines G and T in Fig. 2), but also the level of GDP (that is, fixes the current position of the economy on the horizontal axis of Fig. 2). Since tax revenues vary with GDP, the difficulty in comparing deficits and surpluses in any two years is that the levels of GDP in those years can be different.
Discretionary fiscal policy is about targeting the full-employment (or structural) deficit, but not about changing the cyclical deficit. Since the actual budget deficit consists of structural and cyclical deficits, it cannot be used to judge the government's fiscal policy.
Both discretionary and automatic fiscal policies play an important role in the stabilization measures of the state, however, neither one nor the other is a panacea for all economic ills. As for automatic policy, its built-in stabilizers can only limit the scope and depth of fluctuations in the economic cycle, but they are not able to completely eliminate these fluctuations.
Even more problems arise in the conduct of discretionary fiscal policy. These include:
the presence of a time lag between decision-making and their impact on the economy;
administrative delays;
predilection for stimulus measures (tax cuts are politically popular, but tax increases can cost parliamentarians their careers). Nevertheless, the most reasonable use of both automatic and discretionary policy tools can significantly affect the dynamics of social production and employment, reduce inflation and solve other economic problems.
Conclusion
Summing up, I want to note that the problem of the state budget, regardless of place and time, will remain relevant. A well-formed and consistently pursued fiscal policy, as a rule, is characterized by the achievement of macroeconomic stability, the balance of public finances and leads to a stable, balanced and prosperous lifestyle for all subjects of the state.
Fiscal policy is one of the main instruments of macroeconomic regulation. In practice, fiscal policy is actively used to stabilize the economy. Expansion of public spending and tax cuts are used when it is necessary to help the economy get out of the crisis. Reducing spending and increasing taxes is practiced when it is necessary to slow down the excessive rise.
At present, fiscal policy and the budget are inseparable from each other. This policy is the most important tool for the formation of the state budget. On the other hand, it includes a theoretical basis and in practice determines the budget expenditure items.
Fiscal policy measures are not always successful. Sometimes they are accompanied by burdensome manifestations, and may even hinder the stabilization of the national economy. Sometimes these are inevitable growing pains, and the end result will be beneficial.
The following tasks are solved in the work: the concept and mechanism of action of fiscal policy are defined; studied taxes, government spending and their role in the regulation of national production; Discretionary and non-discretionary fiscal policy are considered, the results are summed up. In this regard, the goal of the course work is achieved.
There are multipliers in fiscal policy:
A. Government spending;
B. Investment;
B. Balanced budget;
G. Tax;
D. Money supply.
Correct answer: A, C, D. Fiscal policy is carried out by the government in the field of taxation, public spending, the state budget, aimed at ensuring employment of the population and preventing and suppressing inflationary processes.
Discretionary fiscal policy is the use of:
A. Built-in stabilizers;
B. Discount rate of interest;
B. Required reserve ratios;
D. Conscious regulation of taxation and public spending.
Correct answer: D. Discretionary fiscal policy involves the government's deliberate regulation of taxation and government spending in order to influence real national output, employment, inflation, and economic growth.
Bibliography
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1. The essence, types and objectives of the fiscal policy of the state.
2. Budget system. State budget, its state and limitations.
3. Public debt and its impact on the national economy.
4. Interrelation of the monetary and fiscal policy of the state.
The essence, types and objectives of the fiscal policy of the state
The essence of fiscal policy
Fiscal (fiscal) policy - these are government measures aimed at ensuring full employment and the production of non-inflationary GDP by changing government spending, the taxation system and approaches to the formation of the state budget as a whole.
These are government actions aimed at forming the optimal volume and structure of public spending to ensure an adequate level of employment, limit and prevent inflation and other negative economic phenomena.
This policy has the following features:
Impact on the state of the economic situation;
Redistribution of national income;
Accumulation of the necessary resources to finance social programs;
Stimulation of economic growth;
Maintaining a high level of employment, etc.
Fiscal policy measures are determined by the goal (combating inflation, stabilizing the economy, ensuring economic growth). The state regulates aggregate demand and real national income through government spending, transfer payments, and taxation.
The fiscal policy of the state is an important essential component of state regulation of the economy. According to J. Keynes and representatives of the neoclassical direction, in economic theories, it is due to fiscal policy that the state performs the main functions of regulating the main macroeconomic processes and phenomena of a market economy.
Fiscal policy is distinguished as discretionary and non-discretionary.
Discretionary Policy - this is a purposeful change in the amount of state taxes, expenditures and the balance of the state budget (the difference between a part of taxes and government purchases) as a result of changes in legislation, the purpose of which is:
Economic stabilization;
Achieving balance in the economy;
Increasing the level of employment;
Decrease in inflation rates.
Discretionary policy can only be implemented over time, as it is linked to the adoption of legislative decisions.
Discretionary fiscal policy instruments include:
Changes in tax rates;
Repeal or introduction of new taxes or tax incentives;
Transfers, the volumes of which are neutral in terms of income. Discretionary fiscal policy, depending on the phase of the cycle, can be:
stimulating (expansive) fiscal policy - this
fiscal policy to increase government spending and cut taxes to boost aggregate demand in the economy during a cyclical downturn;
stimulating (restrictive) fiscal policy - this is a fiscal policy in which there is a reduction in government spending and an increase in taxes in order to reduce aggregate demand in the face of excess demand in a cyclical recovery;
non-discretionary (automatic) fiscal policy - this is a policy of built-in stabilizers, it is not related to changing laws;
automatic ("built-in") stabilizer - is a mechanism that allows you to reduce cyclical fluctuations in the economy without changing tax laws. These stabilizers are:
Progressive tax system;
Transfer payments;
Profit sharing system;
Unemployment benefits during economic downturns.
budget system. State budget, its state and limitations
The main element of the financial system is the state budget.
Along with monetary policy, fiscal policy is the most important component of the macroeconomic policy of the state. fiscal policy called the system of state regulation, carried out through government spending and taxes. Its main purpose is to smooth out the shortcomings of the market mechanism, such as cyclical fluctuations, unemployment, inflation by influencing aggregate demand and aggregate supply.
Depending on the phase of the cycle in which the economy is located, there are two types of fiscal policy: stimulating and restraining.
Stimulating (expansionary) fiscal policy is applied during recession, is aimed at increasing business activity and is used as a means of combating unemployment.
Measures of stimulating fiscal policy are:
Increase in government purchases;
Tax cuts;
Increase in transfer payments.
Restraining (restrictive) fiscal policy used when the economy "overheats", it is aimed at reducing business activity in order to combat inflation.
Measures of restrictive fiscal policy are:
Reducing public procurement;
Increasing taxes;
Decrease in transfer payments.
According to the method of influencing the economy, discretionary fiscal policy and automatic fiscal policy are distinguished.
Discretionary (flexible) fiscal policy is a legislative manipulation of the value of government purchases, taxes and transfers in order to stabilize the economy. These changes are reflected in the main financial plan of the country - the state budget.
Automatic (non-discretionary) fiscal policy based on the action of built-in (automatic) stabilizers. Built-in stabilizers are economic instruments, the value of which does not change, but the very presence of which (their integration into the economic system) automatically stabilizes the economy. Built-in stabilizers automatically work in a restrictive way during an upturn in the economy and in a restraining way during a downturn in the economy. Automatic stabilizers include income taxes; indirect taxes; unemployment benefits and poverty benefits. Built-in stabilizers correct but do not eliminate fluctuations in economic activity. Therefore, methods of automatic fiscal policy should be supplemented by methods of discretionary policy.
The Keynesian model of economic equilibrium connects the stabilizing role of fiscal policy with its impact on the equilibrium volume of national production through changes in total spending. Let us consider the mechanism of action of fiscal policy on the equilibrium volume of national production through a simplified model of the economy, which assumes price stability; reduction of all taxes to a net individual tax; independence of investments from the value of national production and the absence of exports. Government spending directly affects the macroeconomic balance, since government spending is one of the elements of aggregate demand. Their increase has exactly the same effect on the equilibrium level of output as an increase in investment expenditures by the same amount:
where MP G is the government spending multiplier.
An increase in government spending causes an increase in total spending, increasing the equilibrium level of output and employment (14.2).
During a recession, an increase in government spending can be used to increase output, while during a period of economic overheating, on the contrary, a decrease in their level will reduce both aggregate demand and output.
Rice. 14.2. The impact of government spending on macroeconomic equilibrium.
The impact of taxes on macroeconomic equilibrium is not carried out directly, but indirectly through such an element of total expenditure as consumption. Therefore, the multiplier effect of taxes is lower than the multiplier effect of government spending:
where MP T is the tax multiplier.
Ceteris paribus, an increase in taxes will reduce consumer spending. The consumption schedule will shift down and to the right, which will lead to a reduction in national production and employment (Fig. 14.3.).
Rice. 14.3. The impact of taxes on macroeconomic equilibrium
An increase in government spending and taxes by the same amount leads to an increase in output. This effect is called balanced budget multiplier.
Fiscal policy is not able to fully stabilize the economy, as it has the following disadvantages:
1. The delayed impact of fiscal policy on the functioning of the national economy. There are gaps in time between the actual start of a recession or recovery, the moment of recognition, the moment decisions are made and the results are achieved.
2. The value of the multiplier at any given moment of time is not exactly known. Accordingly, it is also impossible to accurately calculate the results of fiscal policy.
3. Fiscal policy can be used for political purposes and condition political business cycles. Political business cycles are actions that destabilize the economy by cutting taxes and increasing government spending during election campaigns and by increasing taxes and reducing government spending after elections.