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Fiscal Policy Conceptual Study
What Is Discretionary Fiscal Policy?
The fiscal policy itself deals with government spendings and tax levels to manage the countrys economy and can be of several types. Discretionary fiscal policy is the policy where the government itself changes the tax rates and its spendings according to a specific goal. These are not automatic changes according to the economic level but the governments actions to stabilize the business cycle, expand or shrink the economy.
What Are Contractionary and Expansionary Fiscal Policies, and How Are They Used?
The two types of fiscal policies are expansionary and contractionary. Expansionary policy stimulates economic growth through increasing government spendings and cutting taxes. It is widely used to end the contraction phase of the economy. The increased government spendings create more jobs and revive the economy. Contractionary policy, on the other hand, cuts government spendings and increases taxes. It is rarely used to slow economic growth and stop inflation.
Are These Policies Economic or Political or Both?
Both policies are used to influence and monitor the nations economy in different phases, so they are primarily economic. However, politicians can use fiscal policies to promote their candidacy in the government because of their formative influence on the economy (Blanchard et al., 2016). That is the reason why fiscal policies can also be political. Expansionary policy is primarily used in this case as voters prefer low taxes and hefty public spending, even if it may be damaging for the economy. These factors make contractionary and expansionary fiscal policies both economic and political.
Why Might Politicians Be Hesitant to Use Contractionary Fiscal Policies When the Economy Is Experiencing Inflationary Pressures?
Expansionary policy is usually in high demand as it seems to revive the economy, but it can lead to inflation and massive debts that damage the economy if it gets out of control. However, politicians rarely turn to contractionary policies at all, because it involves deficits, cutting public-sector jobs or pay, and increasing taxes (Blanchard et al., 2016). It makes the politicians look unprofessional as the citizens never enjoy it, even if it may be useful from the economic perspective.
Reference
Blanchard, O., Ostry, J. D., Ghosh, A. R., & Chamon, M. (2016). Capital flows: expansionary or contractionary? American Economic Review, 106(5), 565-69.
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