Book 12B - Fiscal policy eval

State evals for fiscal policy

Crowding out effect

Size of multiplier

Size of domestic sector

Consumer and investor confidence

Time lags

Conflicts with other macroeconomic goals

Unintended consequences

Describe crowding effect

• Government borrow from central bank to finance expenditure if they are debt-ridden from fiscal budget deficit and do not have sufficient fiscal reserves to fund its fiscal plans -> increase DD for loanable funds -> increase interest rates 

• Increase cost of borrowing -> C and I falls -> increase in G offset by lower C and I -> less effective policy

Describe crowding out effect in SG

• Risk of the crowding out effect is significantly limited

• Singapore government funds its budget primarily through its reserves, which are accumulated over the years from:

  • Tax revenue

  • Net Investment Returns Contribution (NIRC): Income generated from reserves (GIC, Temasek, and MAS)

• Singapore has budget surpluses for most years (except pandemic) because the government rarely needs to compete with the private sector for bank loans to fund a polytechnic or a highway -> no "pressure" on the supply of private capital

Describe

Size of multiplier

Size of domestic sector

Size of multiplier	Small multiplier -> limited increase in GDP  Eg. US -> large multiplier
Size of domestic sector	Eg. SG -> C accounts for only 31% of GDP VS Australia -> C accounts for 52% of GDP  If G and domestic private sector small relative to export sector -> limited impact of fiscal policy

Describe consumer and investor confidence eval

Consumer and investor confidence

Tax cuts may not stimulate C if there is poor outlook on economy Households worried about job security -> withhold C and increase precautionary savings  Households may also worry tax cuts worsen budget position = tax increase in future -> may not spend increase in disposable income  Consumption and investment unresponsive to tax cuts -> limited impact of fiscal policy

Describe 3 types of time lag

1. Action time lag 

• Delay between recognising the economic problem and enactment of the fiscal policy due to imperfect information 

2. Implementation time lag

• In countries where there are different political parties, the government might need more time to get the support needed to implement certain fiscal policies

3. Effect time lag 

• Even if the government  initiate billion-dollar infrastructure projects, the payment of income and multiplier effect may take years

Describe disincentives to work and invest unintended consequence

1. Disincentive to work and invest 

• Higher income tax = lower MB of working -> discourage workers from doing overtime or seeking promotion -> people choose leisure over income 

• Fall in number of hours worked per unit labour -> fall in quantity of labour -> PC falls

Describe increase in frictional UN unintended consequence

UN benefits reduce hardship of being unemployed -> encourage people to spend a longer time looking for the ‘right’ job rather than taking the first job offered