Fiscal Policy

Fiscal policy

involves the government using spending, taxation and budget outcomes to influence resource allocation, redistribute income and reduce fluctuation in economic activity

Budget

a tool that plans government expenditure and revenue for the next financial year in an economy

Budget outcomes

Deficit: expenditure greater than revenue

Surplus: revenue greater than expenditure

Balance: revenue equal to expenditure

Automatic stabilisers

Instruments used in the government budget that counterbalance economic activity, eg, progressive tax and transfer payments

Cyclical component of fiscal policy

caused by changes in the level of economic activity eg, automatic stabilisers

Structural component of fiscal policy

the deliberate change to the budget

The budget stance

shows the impact of fiscal policy on economic growth through changes in the budget outcome (expansionary, contractionary or neutral)

Debt financing

The selling of Treasury bonds to raise funds. It is the main form of deficit financing where investors lend money through bond purchasing and the government pays back the money with interest

Advantages: no change in the money supply, borrowing within the domestic economy, and no increase in net foreign debt

Disadvantages: crowding-out effect that puts upward pressure on interest rates as less money is invested in banks. The gov may need to offer higher interest rates, banks may need to borrow from overseas, increasing CAD