You are not currently logged in. Please create an account or log in to view the full course.
What is Fiscal Policy?
- About
- Transcript
- Cite
Macro – Fiscal Policy
In this course, Dr Silvia Dal Bianco (UCL) explores the topic of Fiscal Policy. In the first module, we explore what we mean by Fiscal Policy. Then, we are going to investigate how fiscal policy can be used to influence aggregate demand and aggregate supply. After that, we are going to look more closely at government spending and taxation. In the penultimate module, we dig deeper into the topic of taxation. Finally, we look at the government budget balance (or imbalance) as well as the national debt.
What is Fiscal Policy?
In this module, we explore what we mean by Fiscal Policy. In particular, we will focus on: (i) how we define fiscal policy, including a discussion of government spending and taxation; (ii) the reasons why governments intervene in market economies, including a discussion of the allocative, redistributive and stabilisation functions of government; (iii) how governments responded during the COVID-19 Pandemic with fiscal stimulus packages; and (iv) the micro and macro effects of fiscal stimulus packages.
Hi, everyone.
00:00:05I'm Doctor Silvia del Bianco,
00:00:06and in this course we are going to discuss fiscal policy
00:00:08in this first module. We are going to investigate what fiscal policy is
00:00:12and the role of the government in the market economy.
00:00:17First of all, let me clarify what fiscal policy is.
00:00:21Fiscal policy is defined as the use of government spending and taxation
00:00:25to influence the economy.
00:00:30Governments typically use fiscal policy to promote
00:00:33strong and sustainable economic growth and employment.
00:00:37Governments spend money to pursue their objectives.
00:00:42Government money is referred to as public expenditure.
00:00:46This public expenditure is raised to the taxation of the population.
00:00:51Understanding fiscal policy is very important for
00:00:56an economist because governments are quite big.
00:00:59Nowadays. Let's have a look to the data.
00:01:03This graph shows our public expenditure has increased in the last
00:01:08150 years and that the trend is increasing.
00:01:14The same considerations hold for taxes which show an increasing trend as well.
00:01:21You can see this in this graph, which shows the taxes as a percentage of GDP.
00:01:27Another thing to note is that governments spend more than they earn
00:01:35and this generate fiscal imbalance.
00:01:39We will leave this consideration for later and concentrate
00:01:43our attention on why governments intervene in market economies.
00:01:47Governments intervene in market economies for three reasons.
00:01:51One to improve the allocation of resources.
00:01:56This is the allocated function of government
00:01:59two
00:02:02to distribute income and wealth.
00:02:03This is the distributional function of the government
00:02:06three to stabilise the economy.
00:02:10In the case of a shock, this is the stabilisation role of the government
00:02:13and now we are going to look at each function one by one,
00:02:18starting with the all locative function of government.
00:02:23We know that economic resources are scarce and economic agents need
00:02:27to decide how to use or how to allocate these resources.
00:02:32In essence, governments can help the economy to
00:02:38a better allocation of resources or to put it in another way,
00:02:42they can help to use the scarce resources in the most efficient way.
00:02:47This kind of statement sounds a bit strange, doesn't it?
00:02:52We know in fact, that that in theory,
00:02:57market economies function very well under certain conditions.
00:03:00When I say that market economies function well,
00:03:05I mean that the market mechanism is able to allocate
00:03:08scarce resources in the best way possible in an optimal way
00:03:12optimal
00:03:18in economics is defined as
00:03:19efficiency, which of course, when an equilibrium is reached
00:03:21so that it is not possible to make an economic
00:03:25agent better off without making another economic agent worse off.
00:03:29Why then, do governments intervene if the market works so well
00:03:34well, the government needs to intervene to correct market failures,
00:03:40which include externalities, imperfect or
00:03:45asthmatic information,
00:03:48public goods and instances in which we have imperfect competition.
00:03:49But simply the government needs to intervene to foster the
00:03:54right conditions for perfect competition to operate in the economy.
00:03:58Turn into the second function
00:04:04the so called distributional function
00:04:06governments try to help society reach an equitable distribution of resources.
00:04:09This is needed because although the market mechanism can ensure under
00:04:15certain conditions that the allocation of resources will be optimal,
00:04:20it does not ensure that it will be equitable
00:04:25and governments can help in achieving fairness between rich and poor.
00:04:29The economic rationale behind this motivation is behavioural.
00:04:34We, as a society,
00:04:38prefer to live in an equitable world free
00:04:39from as much poverty and inequality as possible.
00:04:42Finally, we have the third function, the macroeconomic stabilisation function,
00:04:47the term stabilisation policy normally refers to deliberate changes in
00:04:52government policy instruments in response
00:04:57to changing in macroeconomic conditions.
00:05:00For instance, in order to stabilise the economy,
00:05:04we must pursue high and stable employment.
00:05:07We have a very recent examples of destabilisation policies.
00:05:11In response to the covid pandemic,
00:05:15the EU mobilised a support package of over €3 billion to address the health crisis
00:05:18and the socio
00:05:26economic consequences of the COVID-19 pandemic.
00:05:26Similarly,
00:05:31the US instituted a rescue plan which provided $350 billion in emergency
00:05:32funding for eligible state local territorial
00:05:39governments to respond to the pandemic.
00:05:43In all these instances, government intervention took three forms.
00:05:46Firstly, taxes or subsidies on private sales and or purchases,
00:05:51for instance, the taxing of goods that are overproduced,
00:05:56like the carbon tax and subsidising of goods that
00:06:00are under produced like the back to work scheme.
00:06:04Secondly,
00:06:08the public provision of goods such as healthcare and national defence and,
00:06:09thirdly, public finances of private provision of goods
00:06:15such as academy schools,
00:06:19government intervention as both a macroeconomic and microeconomic function,
00:06:23and it has a macroeconomic and micro economic effects.
00:06:28Think about this example.
00:06:33Government tax people's income to raise revenue to pay out benefits.
00:06:35The macroeconomic function in this case is redistributive,
00:06:41with money being redistributed from rich to poor,
00:06:45with the aim being to make resources distribution more equitable.
00:06:49Let's look at what are the micro and micro factor of this policy.
00:06:54Firstly, taxation reduces people people's income. They can get from working
00:06:58so taxation as both a direct and an indirect effect.
00:07:04The direct effect is at the macro level by mechanically raising tax revenue.
00:07:08But the indirect effect is to reduce work incentives so people work less.
00:07:14This is at the micro level.
00:07:19Secondly,
00:07:21the taxation allows for government spending on benefits which
00:07:22provide income for poor people and the unemployed.
00:07:27Here, the direct effect is at a micro level by reducing poverty.
00:07:31But indirect effect is at the micro level
00:07:36by reducing work incentives for people on benefits.
00:07:39This create what economists call an equity efficiency trade off.
00:07:42The presence of these trade offs mean that the government intervention is not
00:07:47always perfect as it generates a contest between equity on the one hand
00:07:52and efficiency on the other
00:07:58
Cite this Lecture
APA style
Dal Bianco, S. (2023, March 23). Macro – Fiscal Policy - What is Fiscal Policy? [Video]. MASSOLIT. https://massolit.io/courses/macro-fiscal-policy/government-budget-balance-and-the-national-debt
MLA style
Dal Bianco, S. "Macro – Fiscal Policy – What is Fiscal Policy?." MASSOLIT, uploaded by MASSOLIT, 23 Mar 2023, https://massolit.io/courses/macro-fiscal-policy/government-budget-balance-and-the-national-debt
Lecturer