Through fiscal policy, the governing authorities balance tax rates and spending levels that affect that nation’s finances. It goes hand in hand with monetary policy, and with the help of both, the nation’s economic goals get fulfilled through various combinations. Below is a complete guide on the working of fiscal policy, monitoring the policy and its effects on different people through its implementation.
Paul Harmaan explains the working of Fiscal policy
The fiscal policy asserts that the governing power can influence the productivity level of a country’s macroeconomics through fluctuations in public spending and tax rates. In turn, the influence helps curb inflation and is usually balanced when between 2-3%. It further helps in increasing employment and saving the currency from sinking. When a nation’s finances are concerned, fiscal policy indeed plays a significant role.
Finding the balance
Fiscal policy is the balancing act between public spending and tax levels. For instance, a stagnant economy can get stimulated via an increase in spending or a decrease in the tax rate. When this is applied, it is also called quantitative easing, but it also remains at a risk of increasing inflation. It is so because the increase in money in a country’s finances, which the rise might follow in demand, will bring forth a steady decrease in the currency’s value.
Consumer Spending – Paul Haarman
With the economy slowed, employment levels have come down, consumer spending levels are also decreasing, and businesses cannot make substantial profits. To keep the economy steady, the government may reduce taxes, provide consumers with additional spending money, and witness a rise in government spending, creating employment opportunities as asserted by Paul Harmaan. It would result in more money in the economy, but with a balance. And in turn, it ignites the cycle of the economy and stimulates it.
In cases of high inflation, the finances of a nation require curbing. The government, during such situations, can utilize fiscal policy and introduce a rise in taxes that in turn flushes the market from the money. Fiscal policy can also influence government spending and reduce money circulation. Even though such a move can have negative impacts, fiscal policy needs to be regulated to bring about a balance and keep the business cycle steady.
Impact of fiscal policy
According to Paul Haarman, the impact of fiscal policy is not equal for all. Taking into consideration factors like the aims of policymakers and their political orientation may affect the middle class through taxes. And when the economy is declining and an increase in taxation gets witnessed, the middle class is the one that suffers by paying extra taxes in comparison to the upper wealthier class.
In a similar case, only a particular set of people are affected when government spending is adjusted. For instance, the policy to build a road may give employment to construction workers at large. In the end, an obstacle that policymakers face is the government’s involvement and how much of it the economy needs.