Fiscal Policy

The Importance of Monetary and Fiscal Policies

The monetary policy theory was founded by British economist John Maynard Keynes. Fiscal policy is the means or method by which the government controls macroeconomic production levels by changing tax rates and expenditure levels. The government’s power raises wages, reduces inflation, and stabilizes the economy, or maintains the value of capital (Amadeo, Kimberley).

Types of Fiscal Policies

Fiscal strategies are classified into two types: contractionary and expansionary. Expansionary policy aims to stimulate economic development, especially during the contractionary business cycle period. The strategy succeeds by increasing spending while decreasing taxation, or by combining the two methods. An expansionary policy improves the circulation of money, triggering consumers to increase spending. Cumulatively, the policy boosts demand, creating more jobs and facilitating the running of businesses. Whenever there is a situation of using the expansionary policy, debates arise from politician on whether to adopt a supply or demand-side economy. The supply-side has a preference for tax cuts since the impacts frees up businesses encouraging more business ventures and recruiting more workers (Amadeo, Kimberley). The demand-side prefers spending to tax cuts. For instance, through food stamps and unemployment benefits, consumers receive money to acquire products from businesses.

The Contractionary Fiscal Policy

The contractionary fiscal policy is not commonly used since its main purpose is to slow the growth of an economy. This policy reduces inflation for various negative impacts of inflation such as ruining the living standards. Some of the tools used by the US government include taxation on income from sales and capital gains from investments among others. Current government expenditure includes welfare programs, government salaries, subsidies and transfer payments among others that increase economic growth and demand. As for the current budget spending, priorities of the fiscal policy are outlined by the Congress in the annual federal budget. Existing laws approve mandatory budget spending with biggest priorities being Medicare and Medicaid and social security. Before taking a look at the financial year 2016 budget, it is important to note that the current President is determined to lower the corporate tax rate from 35% to 15% (Davis, Julie, and Allan Rappeport). As discussed earlier, such a move cutting the tax rate is likely to bring more businesses in the country and induce employment or create more jobs.

The President’s Budget for the Financial Year 2016

The President’s budget for the financial year 2016 has several tax breaks and initiative for government spending. Among the proposals for further expenditure include spending on infrastructure, with emphasis on clean energy infrastructure and transportation. In relevance with the fiscal policy, the budget proposed for the reduction of taxes among the working-class taxes and the middle-class. The implication of the tax break is that the reduced tax rates increases an individual’s net income. With the high income, high amounts of money circulate among people and ensure that the expenditure is high due to the demand for products. The balance created ensures that the economy continues to grow creating more employment opportunities and reducing the cost of living. In a nutshell, the government curbs the economy when the inflation rates are high using the fiscal policy to slow down the economy by increasing taxes. Also, the policy may involve a decrease in government expenditure to decrease the circulation of money. The policy streamlines the economy throughout the different business cycles ensuring stability. Reducing government expenditure relates to a contractionary fiscal policy which has impacts such as unemployment and a sluggish economy.

Works Cited

“Analysis Of The President’S FY 2017 Budget.” Committee For A Responsible Federal Budget, 2017, http://www.crfb.org/papers/analysis-president%E2%80%99s-fy-2017-budget.

Amadeo, Kimberley. “3 Out Of 4 Presidents Agree: Expansionary Fiscal Policy Is Best.” The Balance, 2017, https://www.thebalance.com/what-is-fiscal-policy-types-objectives-and-tools-3305844.

Davis, Julie, and Allan Rappeport. “Trump Is Said To Seek Cutting Corporate Tax Rate To 15 Percent.” Nytimes.Com, 2017, https://www.nytimes.com/2017/04/24/us/politics/trump-corporate-tax-rate-15-percent.html.