Fiscal Policy Using taxes and government spending to influence the economy

Who controls fiscal policy? Each year the president and his advisors create a federal budget. Uses the Office of Management and Budget – gathers budget information for all federal agencies Pools information into one collective national budget OMB presents budget to president, who can approve or make recommendations for change Each year the president and his advisors create a federal budget. Uses the Office of Management and Budget – gathers budget information for all federal agencies Pools information into one collective national budget OMB presents budget to president, who can approve or make recommendations for change

Who controls fiscal policy? Congress must approve that budget. Determines how much tax revenue the government will bring in and how much money they will spend on programs. “The purse and the sword must not be in the same hands” – George Mason Can create conflict – different members have different fiscal and political agendas Congress must approve that budget. Determines how much tax revenue the government will bring in and how much money they will spend on programs. “The purse and the sword must not be in the same hands” – George Mason Can create conflict – different members have different fiscal and political agendas

Raising Taxes If the government needs more money, it can raise taxes. How will raising taxes affect the economy? If taxes increase, citizens have less money in their pockets. What is the impact on production (GDP), consumption, and employment? Overall, did the economy expand or contract? If the government needs more money, it can raise taxes. How will raising taxes affect the economy? If taxes increase, citizens have less money in their pockets. What is the impact on production (GDP), consumption, and employment? Overall, did the economy expand or contract?

Tax Cuts If the government reduces tax rates, there will be less money in the budget. How will reducing taxes impact the economy? Citizens will have more money in their pockets to spend on goods and services. What is the impact on production (GDP), consumption, and employment? Overall, did the economy expand or contract? If the government reduces tax rates, there will be less money in the budget. How will reducing taxes impact the economy? Citizens will have more money in their pockets to spend on goods and services. What is the impact on production (GDP), consumption, and employment? Overall, did the economy expand or contract?

Increasing Government Spending If the government creates new programs for citizens, they will need more money in the budget. How will an increase in spending affect the economy? Citizens will have more benefits. What is the impact on production (GDP), consumption, and employment? Overall, did the economy expand or contract? If the government creates new programs for citizens, they will need more money in the budget. How will an increase in spending affect the economy? Citizens will have more benefits. What is the impact on production (GDP), consumption, and employment? Overall, did the economy expand or contract?

Decreasing Government Spending If the government cuts back on programs, they will need less money in the budget. How will a decrease in spending affect the economy? Citizens will have fewer benefits. What is the impact on production (GDP), consumption, and employment? Overall, did the economy expand or contract? If the government cuts back on programs, they will need less money in the budget. How will a decrease in spending affect the economy? Citizens will have fewer benefits. What is the impact on production (GDP), consumption, and employment? Overall, did the economy expand or contract?

Discussion If the country was attacked and needed to go to war, what fiscal tools would the government need to use to pay for the war? Why is it rare for politicians to increase taxes even when the economy is in deficit? If the country was attacked and needed to go to war, what fiscal tools would the government need to use to pay for the war? Why is it rare for politicians to increase taxes even when the economy is in deficit?

Discussion If a country has a national debt of 8 trillion dollars and is in recession, why should the government be cautious when using fiscal tools to stimulate growth? Hint: Consider the impact of simultaneously increasing government spending and cutting taxes. If a country has a national debt of 8 trillion dollars and is in recession, why should the government be cautious when using fiscal tools to stimulate growth? Hint: Consider the impact of simultaneously increasing government spending and cutting taxes.