Chapter 30: Introduction to Government Budgets and Fiscal Policy
Chapter Objectives
- Understand government spending and taxation.
- Explore federal deficits and the national debt.
- Learn how fiscal policy is used to fight recessions, unemployment, and inflation.
- Examine automatic stabilizers and problems with discretionary fiscal policy.
- Discuss the question of a balanced budget.
Introduction
- Government Shutdown Example: Yellowstone National Park closed during the U.S. federal government shutdown in October 2013.
- Shutdowns occur when Congress and the President fail to agree on a budget.
- Key issues in 2013: disagreement on spending priorities and the Affordable Health Care Act.
- The shutdown resulted in closed federal services and furloughed employees.
Fiscal Policy
- Definition: Fiscal policy involves government taxing and spending activities to influence the economy.
- One of the two main policy tools for economic management (the other being monetary policy).
- Managed by Congress and the President (contrast with monetary policy managed by the Federal Reserve).
Government Spending
- Federal budget involves more than $3 trillion.
- Two-thirds consist of entitlements and mandatory spending that proceed without further congressional approval.
- Discretionary spending is debated and approved annually by Congress.
Taxation
- Taxes are the main source of government revenue.
- The federal budget process includes projections of tax revenues and planned expenditures.
Federal Deficits and National Debt
- Deficit: Occurs when yearly government expenditures exceed revenues.
- National Debt: Cumulative total of past deficits, minus any surpluses.
Fiscal Policy in Economic Management
- Recession: Fiscal policy can stimulate the economy through increased spending or tax cuts.
- Inflation: May be addressed by decreasing spending or increasing taxes.
- Unemployment: Government may increase public projects to create jobs.
Automatic Stabilizers
- Built-in economic policies that automatically adjust with economic conditions, such as unemployment insurance and progressive taxes.
- Help smooth out the economic cycle without additional government intervention.
Discretionary Fiscal Policy
- Involves deliberate changes to taxation or government spending.
- Causes of potential problems:
- Political disagreements and delays.
- Timing issues in implementing policy changes.
Balanced Budget Debate
- Discusses whether the government should always aim for a balanced budget.
- Arguments for and against balancing the budget.
- Consideration of the economic context when deciding fiscal policy direction.
Reference: Access the full text and additional resources at OpenStax.
Summary
This chapter discusses the intricate relationships between government budgets, taxation, and fiscal policy with a focus on U.S. economic management practices. It explores the impacts of fiscal decisions at federal, state, and local levels, and how they adjust in response to economic challenges and political debates.