First of all one need to know what fiscal policy is; what is the need of discussing something that is not known? Fiscal policy is defined as a way by which a government adjusts the level of spending, to monitor or/and influence the economy of the nations they rule or control. It is the sister strategy to a policy known as monetary policy. With these two policies a central bank influences a nation's money supply. What is the use of these two policies? Since fiscal policy and monetary policy are sister strategies, they have a similar use. These two policies are important because they are used in variety of combinations with a goal to direct a country's economic goals. Here, we will take note of how fiscal policy works, why and how it can be monitored and how its implementation can affect people in an economy
Before the United States experienced the Great Depression, the government's approach to the economy was by use laissez faire. Following the WWII, it was determined that the government had to take a major role in the economy for the regulation of unemployment, cycles of business, inflation and money cost. By using a mixture of both policies mentioned earlier (depending on political orientations and philosophies of those ruling at a particular time, one policy may dominate over another), governments are able to control economic phenomena.
The focus of a country should be infrastructure development which will link many places and create jobs for the large number of unemployed citizens. (Mariger, 1986)
How Fiscal Policy Works
Fiscal policy is based on the theories of an economist John Maynard Keynes from Britain. Also known as Keynesian economics, this theory basically states that government can vary the macroeconomic productive levels by either increasing or decreasing the level of taxation and public spending. This influence therefore curbs inflation.
Effects of fiscal policies and simulation
1. Simulation and work incentives
2. Simulation and labor productivity
3. Simulation and business investment decisions
4. Simulation and infrastructure development
Effects of fiscal policies on the Pattern of demand and supply
When demand and supply are at equilibrium, the producers feel that there is a balance between what they produce and what is consumed. This in return will make them produce more goods and services to supply the market, so they can make more income. If the income of the producer was $100 dollars and it increases to $180, this is the effect of simulation. This increase in production also leads to an increase in expenditure, it also leads to an increase in expenditure on goods and service of other industries. These companies that supply the manufacturers also get to sell more of their goods and services; therefore, they also experience an increase in income. This process continues among all the industries involved; their income and expenditure keeps going up until a new equilibrium between income and expenditure is reached. This in return leads to a new equilibrium between aggregate demand and aggregate supply; this new equilibrium is above the original equilibrium.
Alternatively, changes in indirect taxes can have an effect on the pattern of demands of goods and services. We can take an example of cigarettes and alcohol, a research I did. The rising value of these two commodities is designed so it can cause a substitution effect among the consumers, thereby, the demands of the goods reduce. This goods are, therefore, known as de-merit goods. In contrast, the financial subsidy of a government to producers has an effect of reducing the cost of the producers selling price and production cost and thus encourages an expansion of demand.
If, for now, we take a look at effects of changes in fiscal policy due to simulation, we will see that it affects a nation positively.
What were the growing further and the results?
Can the incentive work be affected by changes in income tax? This remains a controversial subject in the economic literature.
Consider the impact if the basic rate of income tax is increased or an increase in
rate of contributions in national insurance. Rise in direct tax has the effect of reducing post-tax income of those in work, because total netincome lowers for each hour of work taken. This might encourage the individual to work extra hours for the maintenance of his/her target income. Conversely, the effect might be to encourage less work since the higher tax might act as a work disincentive. Of course many workers have little flexibility in the working hours. They will be required to work a certain number of hours and there will be no alternation in that even there are changes in direct tax rate. The government has introduced a lower starting rate of income tax for those who earn little income. This is designed to provide an incentive for people to work extra hours and keep more of their earnings.
What is the impact of an increase in the basic rate of income tax or the rate of national insurance contributions? Rise in direct tax causes the reduction of the post-tax income of working individuals. Who? It is straightforward, for each working hour taken the total net income is lowered. An individual is, therefore, motivated to work extra hours to maintain his or her target income. Conversely, this effect encourages less work because the high tax acts as a disincentive to work. They at a time are contracted to work for a given period that changes direct tax rates. Governments have introduced lower income taxations for lower income earners. This provides an incentive for people to work for extra and extra hours so that they can keep more of what they earn.
Change in income taxes, an increase in income tax may be advantageous to generate revenue for the government, but at the same time, it may be harmful for the tax payers; this is because they may not manage to pay the high taxes that they charged. This may lead to low standards of living to the tax payers; this is because if they pay high taxes, they may not afford the essential things that they need. The government should also increase their expenditure on various sectors that they need to improve to curb the inflation; increase in government expenditure also lowers the interest rates as well as leads to a reduction in taxes. This in return reduces the burden that is passed to consumers as taxes. Middleton (2006) states that in this era of massive inflation the government should not ignore the rising numbers of unemployed; they should consider the Keynesian theory to stabilize the economy
Investment in education
The government should also spend more on education of the low income earners in the population; this should be geared towards the achievement of a literate population. A population made of literate people is highly productive; this is because everybody is able to contribute towards the growth of the economy. An economy that has a majority of educated population grows in innovation and technology advancement; this is brought by the highly educated population. However, education should not be given priority over infrastructure development; this is because the even if the unemployed population is given education, it cannot get employment opportunities in the short run.
How do you apply what you have learnt in the work place?
1. Lowering the cost of goods to increase demands
2. Encourage extra working hours
3. Employ hardworking people.
Some of the obstacles policy maker’s face is deciding how much involvement a government should have on the economy. It is clear that the government is to be involved to a certain extent so that a vibrant economy is attained. The government needs to invest in the most important fiscal policies that will benefit the whole country and lead to economic growth. Examples that simulation has had on the economy include changing the interest rates, investing on infrastructure, and increase on government spending on provision of incentives among others. When the economy has these factors in place, it is able to fight inflation and attain some economic growth.