Tax plan social studies. Fiscal system and fiscal policy plan State fiscal policy plan for social studies

Lecture outline:

20.2 Government expenditures. Expansionary and contractionary fiscal policy.

20.3 Discretionary and automatic fiscal policy.

20.4 Fiscal policy and state budget. State budget deficit.

20.5 Public debt and methods of managing it.

Fiscal policy(fiscal policy) - a set of government measures to regulate government spending and taxes to achieve the level of full employment and further economic growth (therefore, fiscal policy is also called fiscal policy).

Fiscal policy, also called financial and fiscal policy, extends its effect to the main elements of the state treasury (fiscal). Fiscal policy combines such large types and forms of financial policy as budgetary, tax, income and expenditure policies. Fiscal policy extends to the mobilization, attraction of funds necessary for the state, their distribution, and ensuring the use of these funds for their intended purpose, Figure 20.1.

Figure 20.1 – Characteristics of fiscal policy

One of the most important tasks of fiscal policy consists in searching for sources and methods of forming centralized state monetary funds, funds that allow realizing the goals of economic policy.

Fiscal policy goals like any stabilization (countercyclical) policy aimed at smoothing out cyclical fluctuations in the economy, are to ensure:

1 Stable economic growth;

2 Full employment of resources (primarily solving the problem of cyclical unemployment);

3 Stable price levels (solving the problem of inflation).

Fiscal policy- This is the government’s policy of regulating, first of all, aggregate demand. Regulation of the economy in this case occurs by influencing the amount of total expenditures. However, some fiscal policy instruments can be used to influence aggregate supply through influencing the level of business activity. Fiscal policy is carried out by the government.

The instruments of fiscal policy are expenditures and revenues of the state budget, namely:

1 Government procurement;

3 Transfers.

Impact of fiscal policy instruments on aggregate demand

The impact of fiscal policy instruments on aggregate demand varies. From the aggregate demand formula: AD = C + I + G + Xn it follows that government purchases are a component of aggregate demand, therefore their change has a direct impact on aggregate demand, and taxes and transfers have an indirect effect on aggregate demand, changing the amount of consumer spending ( C) and investment costs (I).

At the same time, the growth of government purchases increases aggregate demand, and their reduction leads to a decrease in aggregate demand, since government purchases are part of aggregate expenditures.

An increase in transfers also increases aggregate demand. On the one hand, since with an increase in social transfer payments (social benefits), the personal income of households increases, and, consequently, other things being equal, disposable income increases, which increases consumer spending. On the other hand, an increase in transfer payments to firms (subsidies) increases the possibilities of internal financing of firms and the possibility of expanding production, which leads to an increase in investment expenses. A reduction in transfers reduces aggregate demand.

Tax increases work in the opposite direction. An increase in taxes leads to a decrease in both consumer spending (as disposable income is reduced) and investment spending (as retained earnings, which is the source of net investment, are reduced) and, therefore, to a reduction in aggregate demand. Accordingly, tax cuts increase aggregate demand. Tax cuts lead to a shift of the AD curve to the right, which causes an increase in real GNP.

Therefore, fiscal policy instruments can be used to stabilize the economy at different phases of the economic cycle.

Fiscal policy The state, as part of fiscal policy, is mainly focused on achieving a balanced budget, balanced in government revenues and expenses throughout the entire budget period.

Public expenditure policy is designed primarily to satisfy the demand of the public sector, that is, to satisfy the need for spending on urgent government needs, reflected in the budget expenditure items.

Government Revenue Policy proceeds from existing and potential sources of cash flow to the state budget, taking into account the limited possibilities of using these sources, the excess of which can undermine the economy and ultimately lead to the depletion of revenue generation channels.

Tax policy– part of fiscal economic policy, manifested in the establishment of types of taxes, objects of taxation, tax rates, conditions for collecting taxes, tax benefits. The state regulates all these parameters in such a way that the receipt of funds through the payment of taxes ensures the financing of the state budget.

Taxes– obligatory payments of individuals and legal entities levied by the state. Tax classification is presented in Figures 20.2, 20.3.

Figure 20.2 – Types of taxes, Laffer curve

The dependence of tax revenues on the tax rate was described by A. Laffer. The graphical representation of this dependence is called the A. Laffer curve. According to the A. Laffer curve, an increase in tax rates leads to an increase in tax revenues only up to certain limits. A further increase in the tax rate will lead to an excessive tax burden. It leads to the withdrawal of many manufacturers from the market due to bankruptcy and to tax evasion.

The result of these actions is an undesirable decrease in tax revenues to the treasury. The Laffer curve shows that, under certain conditions, a reduction in tax rates can create incentives for business, promote the formation of additional savings and thereby promote the investment process. Reducing bankruptcies should help expand the tax base, since the number of taxpayers should increase.

Fiscal policy is government policy, one of the main methods of government intervention in the economy in order to reduce fluctuations in business cycles and ensure a stable economic system in the short term. The main instruments of fiscal policy are state budget revenues and expenditures, that is: taxes, transfers and government purchases of goods and services. Fiscal policy in the country is carried out by the state government. Fiscal policy, in addition to monetary policy, is an extremely important component of the state's work as a distributor in the economy. As an instrument of government, fiscal policy has several objectives. The first goal is to stabilize the level of gross domestic product and, accordingly, aggregate demand. Then, the state needs to maintain macroeconomic equilibrium, which can only be successful if all resources in the economy are effectively used. As a result, along with the smoothing of state budget parameters, the general price level will stabilize. Fiscal policy influences both aggregate demand and aggregate supply. If a country is experiencing a depression or is in an economic crisis, the state may decide to implement an expansionary fiscal policy. In this case, the government needs to stimulate either aggregate demand or supply or both parameters at once. To do this, other things being equal, the state increases the size of its purchases of goods and services, reduces taxes and increases transfers, if possible. Any of these changes will lead to an increase in aggregate output, which automatically increases aggregate demand and the parameters of the system of national accounts. Expansionary fiscal policy leads to an increase in output in most cases. The authorities are pursuing a contractionary fiscal policy in the event of short-term “overheating of the economy.” In this case, the government takes measures that are exactly the opposite of those implemented under stimulating economic policies. The government reduces its spending and transfers and increases taxes, which leads to a reduction in both aggregate demand and, possibly, aggregate supply. Such policies are regularly pursued by the governments of a number of countries in order to slow down the rate of inflation or avoid its high rates in the event of an economic boom. Economists also divide fiscal policy into two types: discretionary and automatic. Discretionary policies are officially declared by the government. At the same time, the state changes the values ​​of fiscal policy parameters: government purchases increase or decrease, the tax rate, the size of transfer payments and similar variables change. Automatic policy refers to the work of “built-in stabilizers”. These stabilizers are such as a percentage of income tax, indirect taxes, and various transfer benefits. Payment amounts are automatically changed in case of any economic situation. For example, a housewife who lost her fortune during the war will pay the same percentage, but on a smaller income, therefore, the taxes for her will automatically decrease.

Disadvantages of fiscal policy

Crowding-out effect. This effect, also known as the crowding out effect, occurs when government purchases of goods and services increase in order to stimulate the economy. It is recognized as the main drawback of fiscal policy by many economists, especially representatives of monetarism. When a government increases its spending, it needs money in the financial market. Thus, the demand for money in the debt market increases. This leads to banks raising prices for their loans, that is, increasing their interest rates for reasons such as profit maximization or simply a lack of money to issue loans. Investors and entrepreneurs of companies, especially start-ups, do not like an increase in the interest rate when the company does not have its own “start-up” cash capital. As a result, due to high bank interest rates, investors have to take out fewer and fewer loans, which leads to a decrease in investment in the country's economy. Thus, expansionary fiscal policies are not always effective, especially if businesses of any kind are not developing properly in the country. The “Crowding-in” effect is also possible, that is, an increase in investment due to a reduction in government spending. Other disadvantages:

Government Budget Imbalance: The government's constant handling of its budget can lead to ineffective budget allocation. For example, the government cannot regularly increase its spending in order to increase its GDP, since it, like any macroeconomic agent, may incur losses, which is obviously not in the interests of the state.

Uncertainty: The state of the economy cannot be predicted with perfect accuracy because not all agents in the economy act rationally or in the way the government would like. It is not always possible to accurately determine the best economic policy to smooth out cyclical fluctuations. Implementing the wrong policies can have a serious impact on the economy.

Plan:

• Discretionary fiscal policy

• a) changes in government procurement

• b) changes in taxes

• c) balanced budget multiplier

• d) incentive policy

• e) containment policy

• 2 Non-discretionary fiscal policy

• 3 The budget is balanced annually and the budget is balanced on

• on a cyclical basis

• 4 Criticism of fiscal policy

• Household and business decisions are based on private interests, so the outcome of such decisions can be recession or inflation. Government is an instrument of society as a whole, so government decisions on spending and taxes can be made in such a way as to influence the economy to increase social welfare.

• Fiscal policy can be discretionary (deliberate) and non-discretionary (based on the action of automatic built-in stabilizers)

Discretionary fiscal policy

• This is the deliberate manipulation of taxes and government spending in order to change real output and employment, control inflation and accelerate economic growth.

1a. Changes in government spending.

Government purchases (G) are part of aggregate demand, along with household consumption and business investment. Therefore, an increase in government purchases will lead to an increase in AD and if the economy is not yet at full employment, then this increase in G will lead to an expansion in volume output to increase income to reduce unemployment

• At the same time, it must be taken into account that government spending is subject to the multiplier effect in the same way as other elements of AD

• For example with MPS = ¼, an increase in government spending by 20 billion$ will cause an increase in equilibrium GNP by 80 billion$

At the same time, the growth of G must not be achieved through an increase in taxes, since an increase in taxes leads to a decrease in equilibrium GNP. In order to have a stimulating effect on the economy, an increase in government spending must be accompanied by a budget deficit. Fundamental Keynes's recommendations included increasing deficit financing to overcome a recession, or depression

• Conclusion: by increasing the volume of government purchases the government makes injections into the national economy On the other hand, reducing government spending will lead to a multiple reduction in the equilibrium GNP

• The cumulative effect of changes in government spending:

•  GNP   G*M

1b. Tax changes

The second side of fiscal policy is the collection of taxes; Let’s simply imagine that the government introduces a one-time lump sum tax, i.e. a tax of constant value, which gives the same amount of tax revenue for any value of GNP. For example, a tax of 20 billion. $ will reduce disposable income by this amount

• With MPS = ¼, consumption will decrease by 20 * ¾ = 15 billion$ savings will decrease by 20 * ¼ = 5 billion $ In this example, equilibrium GNP will decrease as a result of a decrease in consumption C by 15 * 4 = 60 billion$ (4 is multiplier in our example it is equal to M = 1/1/4 = 4)

To

To taxes unlike government spending reduce consumption (and savings) i.e. they are income leakages The direction of the impact of G (government expenditures) and T (taxes) on the value of national production and income is opposite. At the same time, the multiplier effect of government spending is “stronger” than the multiplier effect of taxes. The fact is that G directly enters AD, and taxes T, changing the amount of disposable income, affect both consumption C and savings S.

• Tax multiplier Mt = MRS/ MPS The total effect of changes in taxes is equal to the magnitude of this change multiplied by the value of the tax multiplier:

• GNP   T * Mt

or

• Let's look at the example of how government spending and taxes affect the equilibrium GNP. Let us assume that in order to increase the volume national production is considered to increase G by 20 billion $ or tax reduction T by the same amount MPS = 1/4

1st century Balanced budget multiplier.

To further analyze fiscal policy, let’s combine the multiplier effects of government spending and taxes Suppose the government adheres to the concept of an annually balanced budget. Then, considering an increase in G, the government must simultaneously plan an increase in T by the same amount. Under the influence of an increase in G, aggregate demand will increase, and under the influence of an increase in taxes, AD will decrease. 

• At the same time, since the government spending multiplier is “stronger” than the tax multiplier the final result will be an increase in output equal to the initial increase in G and T

Overall result GNP 50.

• Overall result GNP 50.

• In other words, the balanced budget multiplier is 1

• At the same time, the balanced budget multiplier operates regardless of the value of MPS and MPC

• All of the above proves possibility of use fiscal policy to stabilize the economy 

• The main instruments of discretionary fiscal policy are:

• - changing the volume of tax exemptions by introducing or eliminating taxes or changing the tax rate By changing the tax rate, the government can keep revenues from being cut during a recession or, conversely, reduce disposable income during a boom;

• implementation of employment programs aimed at providing the unemployed with work at the expense of the state budget;

• implementation of social programs  which include the payment of old age benefits, disability benefits, benefits for the poor, education expenses, etc. These programs allow stabilizing economic development when incomes are declining and need is increasing

• Depending on the state of the economy and the government's goals, fiscal policy can be either stimulating(expansionist) or deterrent(restrictive)

1 year Expansionary discretionary fiscal policy

carried out during a period of recession and high unemployment Its goal is to increase AD through an increase in G and (or) a decrease in T As a result of an increase in AD, national production will increase and employment will grow A negative consequence of a stimulating fiscal policy is the state budget deficit The deficit can be financed through loans or through the issue of money

• The first method can lead to the so-called push-out effect of private investment(as a result of government loans in the domestic money market, the interest rate increases and private business investment decreases which can reduce the stimulating effect to zero ) The second method is fraught with price increases

1d. Contractionary fiscal policy

• is aimed at combating inflation caused by excess demand which occurs in a state of full employment It consists of reducing G and (or) increasing taxes T The result is a budget surplus Two ways to use this surplus: paying off debt or withdrawing money from circulation

But

But By buying back its debt obligations from the public the government transfers its excess tax revenues back to the money market causing the interest rate to fall and thus stimulating investment and consumption which will again cause prices to rise Seizing the surplus means the government is withdrawing some amount of purchasing power from the general flow of income and expenses and retains it.

• It can be concluded that the complete withdrawal of the budget surplus is a more restraining measure.

Depending on how large the public sector is, the most preferable policy in times of crisis is chosen. Those economists who believe that the public sector should be expanded to compensate for the various errors of the market system may recommend expanding aggregate spending during a recession by growth of government purchases and limiting total expenditures during periods of rising inflation by increasing taxes

• Conversely, “conservative” economists, who believe that the public sector is overly bloated and inefficient, advocate an increase in total spending by cutting taxes, and in times of rising inflation, they propose reducing total spending by cutting government spending.

Non-discretionary fiscal policy –

• This is a policy of built-in (automatic) stabilizers that operate without special government decisions on the basis of self-regulation.

• The automaticity of fiscal policy is due to the fact that tax revenues and a significant part of government spending are associated with the activity of the private sector and change automatically with changes in income. Main built-in stabilizers are income tax and unemployment benefits; income indexation, etc.

If there is a recession in the economy, that is, personal incomes and corporate incomes decrease, then tax exemptions automatically decrease, which, other things being equal, mitigates the consequences of a reduction in aggregate demand, helps stabilize production output, and the transition to a lower tax rate (in connection with a fall in income) increases the value of the multiplier helping the economy emerge from recession

• However, as a result of a decrease in tax withdrawals, a budget deficit arises or increases. Thus, the budget deficit becomes a necessary concomitant of a fall in production.

During booms and inflation, incomes rise, tax rates rise, the value of the multiplier decreases, which contributes to a reduction in aggregate demand and output. Thus, the ability of the tax system to reduce tax withdrawals during a recession and increase them during a period of inflation is a powerful automatic factor that stabilizes the economy 

Unemployment benefits have a similar effect on the economy When employment is high, the employment fund increases and puts a restraining pressure on aggregate spending, and during periods of low employment, the funds of the fund are intensively spent, supporting consumption and mitigating the fall in production. Thus, stabilizers work in both directions – both upward and downward

• However, built-in stabilizers cannot completely resolve macroeconomic problems They soften cycle fluctuations but cannot eliminate their cause therefore, automatic fiscal policy is complemented by discretionary which leads to an increase in the budget deficit during recessions and a budget surplus during inflation

Annually balanced budget and cyclically balanced budget

• An annually balanced budget is generally accepted as a desirable goal of public finance, but it increases economic cycle fluctuations.

• Suppose the economy faces a long period of unemployment and falling revenues, under such circumstances tax revenues will automatically decline. In an effort to balance the budget, the government must either increase tax rates, reduce government spending, or use a combination of the two.

• The problem is that all these measures are restrictive in nature; Each of them further reduces rather than increases aggregate demand.

• In another situation: when the economy has reached full employment, the annually balanced budget will cause inflation to accelerate; as soon as monetary income increases during the inflation process, tax revenues automatically increase and the government is able to spend them.

• To an annually balanced budget is not economically neutral

• From the point of view of conservative economists, budgetary deficits are a clear demonstration of political irresponsibility

• Deficits allow policymakers to provide society with the benefits of increased government spending programs while avoiding the costs of higher taxes.

• “Fiscal conservatives” believe that government programs tend to grow faster than they should and advocate balancing the government budget every year.

• Currently, the budget deficit is a typical state of the economy of most countries Its size is constantly growing But the budget deficit cannot serve as an indicator of the state of the economy And a deficit-free budget in itself does not mean economic well-being

• The idea of ​​a budget balancing on a cyclical basis assumes that the government is implementing a countercyclical policy, i.e. pursuing a discretionary fiscal policy according to Keynes. In this case, the budget does not have to be balanced annually It is enough that it is balanced during the economic cycle

During a recession, a government budget deficit is allowed, which will be compensated in the next phase of economic recovery. The key problem with this budget concept is that ups and downs in the economic cycle may not be the same in depth and duration. Consequently, the task of stabilization comes into conflict with the task of balancing the budget during the cycle.

• For example, a long and deep recession followed by a short and modest period of prosperity would mean large deficits in the recession, small or no surpluses in the prosperity, and hence cyclical fiscal deficits.

4. Criticism of fiscal policy.

• After the Second World War, discretionary policies became the main means of regulating the economies of developed countries.

• But its effectiveness is limited by a number of problems.

Time problems:

• A) the difficulty of timely identification of emerging crises

• B) administrative delays - during the passage of bills on changing fiscal policy through government institutions, the economic situation in the country may change

Political problems

• A) the need to solve problems other than stabilizing the economy.

• B) a preference for stimulus measures that are popular among voters.

Wipe effect:

• Wipe effect: The stimulative effect of fiscal policy may be weakened if it crowds out some private investment.

• Inflation: When the economy is close to full employment, part of the impact of expansionary fiscal policy will be reflected in increased inflation rather than in output and employment growth.

Proponents of supply-side economics point out that Keynesian fiscal policy fails to take into account the impact of tax changes on aggregate supply. They argue that lower tax rates need not lead to lower tax revenues. In fact, rate cuts can be expected to taxes will ensure an increase in tax revenues due to a significant increase in national output and income

• This expanded tax base will ensure tax revenue growth even at lower rates

• Most economists are very wary of the supply-side economics interpretation of tax cuts described above. First, they feel that the expected positive impact of tax cuts on incentives to work is

• savings and investment, and incentives to take risks may not actually be as strong as supply-side economists hope; Second, any shifts to the right in the aggregate supply curve are long-term in nature nature while the impact on demand will be felt in the economy much faster

Lecture 16. Budgetary and tax (fiscal) policy

2. Types of taxes. Taxation in the Republic of Belarus.

1. The essence and functions of taxes. Taxes – mandatory payments collected by central and local government bodies from legal entities and individuals and received by budgets at various levels. The totality of taxes and other payments collected in the state forms tax system . Its main elements are: subject of taxation– a legal or natural person who is a tax payer; object of taxation– income, property or price of goods subject to tax; tax bearer– the person who actually pays the tax; tax rate– the amount of tax per unit of taxation; tax benefit– full (partial) exemption from tax.

Basic functions of taxes :

– fiscal– replenishment of state budget revenues;

– regulating– stimulation of economic activity;

– distribution– redistribution of income received by business entities.

The most important tax principles : universality– tax coverage of all economic entities receiving income; stability– stability of tax types and rates over time; obligation– compulsory payment of taxes; social justice – equal conditions for the tax burden for different business entities and segments of the population.

The graphical relationship between state budget revenues and the dynamics of tax rates is the Laffer curve (Fig. 21.1).

Rice. 21.1. Laffer curve

With high tax rates, there is no incentive to increase income, therefore, tax revenue to the budget decreases.

2. Types of taxes. Taxation in the Republic of Belarus. Taxes are classified according to the subjects of taxation (taxes on individuals and legal entities); by levels of government (republican and local); by the nature of tax withdrawal (direct and indirect).

Direct taxes– are levied directly at a rate or in a fixed amount from the income or property of the taxpayer.

Indirect taxes– are collected by inclusion in the price of a product or service and are paid by the buyer.

In the Republic of Belarus there are the following main types of taxes:

– tax on profit and income of enterprises – direct tax, rate 24%;

– value added tax (VAT) – indirect tax, rate 18%, for certain goods and services – 10%;

– export and import tax (customs duties) – indirect tax;

– personal income tax – direct tax, rate 12%;

– excise tax is an indirect tax, levied at different rates for different goods subject to this tax.

The taxes listed above provide more than 80% of revenues to the state budget of the Republic of Belarus. In addition to them, the following are also charged: environmental tax, land tax, real estate tax, local taxes, contributions to extra-budgetary funds for social protection and employment, state duty, etc. In the future, it is planned to improve the tax system by taking the following measures: reducing the total tax burden; reduction of tax benefits; simplification of the tax payment procedure.

3. Fiscal policy, its types and instruments. Fiscal policy – the impact of the state on the state of the economy by changing the amount of government spending and taxes.

The following are distinguished: fiscal policy goals: smoothing out economic cycle fluctuations; ensuring sustainable economic growth; achieving a high level of employment at moderate inflation rates.

Highlight two types of fiscal policy: discretionary and non-discretionary (automatic). Discretionary financial policy – conscious decisions of the government to change the amount of taxes and government spending. It can be stimulating (increasing government spending, reducing taxes to stimulate production growth) or restrictive (increasing taxes and reducing government spending to curb inflation).

Non-discretionary (automatic) fiscal policy– does not require special government decisions, because is based on the action of built-in stabilizers, leading to automatic changes in tax revenues and government spending. Built-in stabilizers maintain economic stability based on self-regulation. The stabilizers are: unemployment benefits, poverty benefits, and progressive income taxes. During a recession, stabilizers lead to a decrease in tax revenues and an increase in budget expenditures; during a period of recovery, the reverse process occurs.

Fiscal policy can be accompanied by a multiplier effect in the form of GDP growth that significantly exceeds the increase in government spending that caused it. Highlight: government spending multiplier– the ratio of changes in real GDP to changes in state budget expenditures; tax multiplier– the ratio of the change in real GDP to the change in taxes that caused it; balanced budget multiplier– an equal increase in government spending and taxes causes an increase in income by an amount equal to the increase in government spending and taxes.

Fiscal policy, its goals and instruments

Fiscal policy is the measures taken by the government to stabilize the economy by changing the amount of government budget revenues and/or expenditures. (This is why fiscal policy is also called fiscal policy.)

The goals of fiscal policy, like any stabilization (countercyclical) policy aimed at smoothing out cyclical fluctuations in the economy, are to ensure: 1) stable economic growth; 2) full employment of resources (primarily solving the problem of cyclical unemployment); 3) stable price level (solving the problem of inflation).

Fiscal policy is the government's policy of regulating, first of all, aggregate demand. Regulation of the economy in this case occurs by influencing the amount of total expenditures. However, some fiscal policy instruments can be used to influence aggregate supply through influencing the level of business activity. Fiscal policy is carried out by the government.

The instruments of fiscal policy are expenditures and revenues of the state budget, namely: 1) government procurement; 2) taxes; 3) transfers.

Impact of fiscal policy instruments on aggregate demand

The impact of fiscal policy instruments on aggregate demand varies. From the aggregate demand formula: AD = C + I + G + Xn it follows that government purchases are a component of aggregate demand, therefore their change has a direct impact on aggregate demand, and taxes and transfers have an indirect effect on aggregate demand, changing the amount of consumer spending ( C) and investment costs (I).

At the same time, the growth of government purchases increases aggregate demand, and their reduction leads to a decrease in aggregate demand, since government purchases are part of aggregate expenditures.

An increase in transfers also increases aggregate demand. On the one hand, since with an increase in social transfer payments (social benefits), the personal income of households increases, and, consequently, other things being equal, disposable income increases, which increases consumer spending. On the other hand, an increase in transfer payments to firms (subsidies) increases the possibilities of internal financing of firms and the possibility of expanding production, which leads to an increase in investment expenses. A reduction in transfers reduces aggregate demand.

Tax increases work in the opposite direction. An increase in taxes leads to a decrease in both consumer spending (as disposable income is reduced) and investment spending (as retained earnings, which is the source of net investment, are reduced) and, therefore, to a reduction in aggregate demand. Accordingly, tax cuts increase aggregate demand. Tax cuts lead to a shift of the AD curve to the right, which causes an increase in real GNP.

Therefore, fiscal policy instruments can be used to stabilize the economy at different phases of the economic cycle.

Moreover, from the simple Keynesian model (the “Keynesian cross” model) it follows that all instruments of fiscal policy (government purchases, taxes and transfers) have a multiplier effect on the economy, therefore, according to Keynes and his followers, regulation of the economy should be carried out by the government with using the tools of fiscal policy, and above all by changing the amount of government purchases, since they have the greatest multiplier effect.

Depending on the phase of the cycle in which the economy is located, fiscal policy instruments are used differently. There are two types of fiscal policy: 1) stimulating and 2) contractionary.

Expansionary fiscal policy is applied during a recession (Figure 10.1(a)), aims to reduce the recessionary output gap and reduce the unemployment rate and is aimed at increasing aggregate demand (aggregate expenditure). Its tools are: a) increasing government procurement; b) tax reduction; c) an increase in transfers. Contractionary fiscal policy is used during a boom (when the economy overheats) (Fig. 10.1.(b)), aims to reduce the inflationary output gap and reduce inflation and is aimed at reducing aggregate demand (aggregate expenditures). Its tools are: a) reduction of government procurement; b) increase in taxes; c) reduction in transfers.

In addition, fiscal policy is distinguished: 1) discretionary and 2) automatic (non-discretionary). Discretionary fiscal policy is a legislative (official) change by the government in the amount of government purchases, taxes and transfers in order to stabilize the economy.

Automatic fiscal policy is associated with the action of built-in (automatic) stabilizers. Built-in (or automatic) stabilizers are instruments whose value does not change, but the very presence of which (their integration into the economic system) automatically stabilizes the economy, stimulating business activity during a recession and restraining it during overheating. Automatic stabilizers include: 1) income tax (including both household income tax and corporate income tax); 2) indirect taxes (primarily value added tax); 3) unemployment benefits; 4) poverty benefits.

Let's consider the mechanism of the impact of built-in stabilizers on the economy.

The income tax works as follows: during a recession, the level of business activity (Y) decreases, and since the tax function has the form: T = tY (where T is the amount of tax revenue, t is the tax rate, and Y is the amount of total income (output)), then the amount of tax revenue decreases, and when the economy “overheats”, when the actual output is at its maximum, tax revenue increases. Note that the tax rate remains unchanged. However, taxes are withdrawals from the economy that reduce the flow of expenses and, therefore, income (remember the circular model). It turns out that during recession the withdrawals are minimal, and during overheating they are maximum. Thus, due to the presence of taxes (even lump sum, i.e. autonomous), the economy automatically “cools down” when it overheats and “heats up” during a recession. As was shown in Chapter 9, the appearance of income taxes in the economy reduces the value of the multiplier (the multiplier in the absence of an income tax rate is greater than in its presence: >), which enhances the stabilizing effect of the income tax on the economy. It is obvious that a progressive income tax has the strongest stabilizing effect on the economy.

Value Added Tax (VAT) provides built-in stability in the following ways. During a recession, sales volume decreases, and since VAT is an indirect tax, part of the price of a product, when sales volume falls, tax revenues from indirect taxes (withdrawals from the economy) decrease. In overheating, on the contrary, as total incomes rise, sales volume increases, which increases indirect tax revenues. The economy will automatically stabilize.

As for unemployment and poverty benefits, the total amount of their payments increases during a recession (as people begin to lose their jobs and become poor) and decreases during a boom, when there is “overemployment” and rising incomes. (Obviously, to receive unemployment benefits, you need to be unemployed, and to receive poverty benefits, you need to be very poor). These benefits are transfers, i.e. injections into the economy. Their payment contributes to the growth of income, and, consequently, expenses, which stimulates economic recovery during a recession. A decrease in the total amount of these payments during a boom has a restraining effect on the economy.

In developed countries, the economy is regulated by 2/3 through discretionary fiscal policy and 1/3 by the action of built-in stabilizers.

The Impact of Fiscal Policy Instruments on Aggregate Supply

It should be borne in mind that fiscal policy instruments such as taxes and transfers act not only on aggregate demand, but also on aggregate supply. As noted, tax cuts and increased transfers can be used to stabilize the economy and combat cyclical unemployment during recessions, stimulating growth in aggregate spending and hence business activity and employment. However, it should be borne in mind that in the Keynesian model, simultaneously with the growth of aggregate output, the reduction of taxes and the growth of transfers causes an increase in the price level (from P1 to P2 in Fig. 10-1(a)), i.e. is a pro-inflationary measure (provokes inflation). Therefore, during a boom period (inflationary gap), when the economy is “overheated” (Fig. 10-1(b)), tax increases can be used as an anti-inflationary measure (the price level decreases from P1 to P2) and tools for reducing business activity and stabilizing the economy and reduction in transfers.

However, since firms view taxes as costs, an increase in taxes leads to a reduction in aggregate supply, and a decrease in taxes leads to an increase in business activity and output. A detailed study of the impact of taxes on aggregate supply belongs to the economic adviser to US President R. Reagan, an American economist, one of the founders of the concept of “supply-side economics” Arthur Laffer. Laffer constructed a hypothetical curve (Fig. 10-2.), with the help of which he showed the impact of changes in the tax rate on the total amount of tax revenues to the state budget. (This curve is called hypothetical because Laffer made his conclusions not on the basis of an analysis of statistical data, but on the basis of a hypothesis, i.e. logical reasoning and theoretical inference).

Using the tax function: T = t Y, Laffer showed that there is an optimal tax rate (t opt.), at which tax revenues are maximum (T max.). If the tax rate is increased, the level of business activity (aggregate output) will decrease and tax revenues will decrease because the tax base (Y) will decrease. Therefore, in order to combat stagflation (a simultaneous decline in production and inflation), Laffer in the early 80s proposed a measure such as reducing the tax rate (both income and corporate profits).

The fact is that, in contrast to the impact of tax cuts on aggregate demand, which increases production volume but provokes inflation, the impact of this measure on aggregate supply is anti-inflationary in nature (Fig. 10.3), i.e. production growth (from Y1 to Y*) is combined in this case with a decrease in the price level (from P1 to P2).

Advantages and disadvantages of fiscal policy

The advantages of fiscal policy include:

1. Multiplier effect. All fiscal policy instruments, as we have seen, have a multiplier effect on the value of equilibrium aggregate output.
2. No external lag (delay). External lag is the period of time between the decision to change a policy and the appearance of the first results of its change. When the government decides to change fiscal policy instruments, and these measures come into effect, the result of their impact on the economy manifests itself quite quickly. (As we will see in Chapter 13, an external lag is characteristic of monetary policy that has a complex transmission mechanism (monetary transmission mechanism)).
3. Availability of automatic stabilizers. Since these stabilizers are built-in, the government does not need to take special measures to stabilize the economy. Stabilization (smoothing out cyclical fluctuations in the economy) occurs automatically.

Disadvantages of fiscal policy:

1. Displacement effect. The economic meaning of this effect is as follows: an increase in budget expenditures during a recession (increase in government purchases and/or transfers) and/or a reduction in budget revenues (taxes) leads to a multiplicative increase in total income, which increases the demand for money and increases the interest rate on money market (loan price). And since loans are primarily taken out by firms, an increase in the cost of loans leads to a reduction in private investment, i.e. to “crowding out” part of the investment expenditures of firms, which leads to a reduction in output. Thus, part of total output is “crowded out” (underproduced) due to a reduction in private investment spending as a result of rising interest rates due to the government's expansionary fiscal policy.

2. Presence of internal lag. The internal lag is the period of time between the need to change a policy and the decision to change it. Decisions on changing fiscal policy instruments are made by the government, but their implementation is impossible without discussion and approval of these decisions by the legislative body (Parliament, Congress, State Duma, etc.), i.e. giving them the force of law. These discussions and agreements may require a long period of time. In addition, they come into effect only from the next financial year, which further increases the lag. During this period of time, the economic situation may change. So, if initially there was a recession in the economy, and stimulating fiscal policy measures were developed, then at the moment they begin to take effect, the economy may already begin to recover. As a result, additional stimulation may lead the economy to overheat and provoke inflation, i.e. have a destabilizing effect on the economy. Conversely, contractionary fiscal policies designed during a boom may, due to the presence of a long internal lag, worsen a recession.

3. Uncertainty. This shortcoming is characteristic not only of fiscal, but also of monetary policy. The uncertainty concerns:

• problems of identifying the economic situation It is often difficult to accurately determine, for example, the moment when a period of recession ends and recovery begins, or the moment when a recovery turns into overheating, etc. Meanwhile, since at different phases of the cycle it is necessary to apply different types of policies (stimulating or restrictive), an error in determining the economic situation and choosing the type of economic policy based on such an assessment can lead to destabilization of the economy;
• the problem of exactly how much the instruments of public policy should be changed in each given economic situation. Even if the economic situation is determined correctly, it is difficult to determine exactly how much, for example, it is necessary to increase government purchases or reduce taxes in order to ensure an economic recovery and reach the potential output, but not exceed it, i.e. How to prevent overheating and acceleration of inflation. And vice versa, when implementing a contractionary fiscal policy, how not to lead the economy into a state of depression.

4. Budget deficit. Opponents of Keynesian methods of regulating the economy are monetarists, supporters of supply-side economics and rational expectations theory - i.e. Representatives of the neoclassical trend in economic theory consider the state budget deficit to be one of the most important shortcomings of fiscal policy. Indeed, the instruments of stimulating fiscal policy, carried out during a recession and aimed at increasing aggregate demand, are an increase in government purchases and transfers, i.e. budget expenditures, and tax reduction, i.e. budget revenues, which leads to an increase in the state budget deficit. It is no coincidence that the recipes for government regulation of the economy that Keynes proposed were called “deficit financing.”

The problem of the budget deficit became especially acute in most developed countries that used Keynesian methods of regulating the economy after World War II, in the mid-70s, and in the United States the so-called “twin debts” arose, in which the government deficit The budget was combined with a balance of payments deficit. In this regard, the problem of financing the state budget deficit has become one of the most important macroeconomic problems.