Putting Fiscal Policy into Perspective – Paul Haarman’s Explanation

The GDP is one of the indicators used to evaluate the economy’s success, shares Paul Haarman. Government fiscal policy plays a crucial role in driving the economy forward and ensuring growth. In other words, it’s one of the most critical ways in which a government can spur job creation, invest in our future and make life better for all Americans. This is why our tax code is designed to be fair and efficient and to promote growth.


In the short-term, fiscal policy is used to counter economic fluctuations and stimulate economic output. In the long term, it’s used to drive change through investments that make our country more productive and competitive. Moreover, fiscal policy is often accomplished through spending or tax changes by Congress. As a result, the federal budget is a good indicator of the government’s priorities and commitment to programs that benefit all Americans.


Merits of Fiscal Policy


As Paul Haarman explained, fiscal policy is a crucial tool to achieve macroeconomic objectives while maintaining budgetary stability in the medium term. The government can choose a mix of revenue and expenditure policies to achieve its development goals. For example, the fiscal policy helps determine the size of deficit or surplus, the allocation of government spending, and thus whether or not saving is encouraged. Research conducted by economists indicates that fiscal policy has real effects on economic activity.


Stimulate Business Investment And Growth


Taxes discourage labor and capital from moving to a new location. Therefore, labor and capital are left available in existing locations when the government increases taxes. This creates a drag on the economy, which will result in less than optimal levels of growth. Conversely, when the government reduces taxes on income, business activity receives a net benefit that helps it grow faster than expected.


Reduce Government Deficits


Businesses with higher profits may seek increased wages to offset higher tax rates that would apply to profits earned shortly. Increasing taxes and reducing expenditures achieve deficit reduction. According to Paul Haarman, fiscal policy and monetary policy are intertwined in every economy. Monetary policy is an effective countercyclical tool. However, monetary policy has a more negligible effect when there is already a high level of unused capacity in the economy.


Contain Inflationary Pressure


It can be argued that inflation may be an effect of the government printing too much money, and it may also cause a fall in actual output or an increase in unemployment. When government spends too much and runs a huge budget deficit, the increase in demand for goods and services will lower the unemployment level. This will result in an excess supply of money, which causes inflation to rise. High inflation was experience during 1975-1981 following the oil shock.


Job Opportunities Explained By Paul Haarman


If the central bank decides to reduce interest rates and stimulate business activity, this will increase employment levels. In addition, the central bank can also use fiscal policy to promote employment growth by increasing fiscal spending and introducing tax reliefs. This will lead to an increase in aggregate demand, which will increase demand for labor leading to job creation.


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