Example Of Essay On Fiscal Policy And Investment

The role of policy makers in any economy is to regulate macroeconomic activities with the main goal of maintaining economic stability. The goal of the policy maker is to maintain stability, which is significant in promoting economic growth and social welfare of the citizens. The policy makers have implemented various policies to stimulate the economy since the financial crisis when government suffered a critical national debt. They are also trying to implement a reliable strategy for balancing the government’s budget in the long- run to solve macroeconomic problems. Therefore, implementing long-term fiscal sustainability is vital for today’s economic growth because its aim is to stimulate the economy.
The fiscal policy focuses on government spending, taxes or the government’s budget balance to regulate the economy. In order to achieve economic growth today, policy makers need to achieve fiscal sustainability, which is the sustainability of the government’s level of borrowing. The government’s level of borrowing becomes unsustainable when lenders lack assurance in the government’s capability of paying them back. Currently, the tax and spending policies are out of alignment because government spend more on the entitlements than it receives from the investment. Likewise, government borrows every year in order to make ends meet which increases the national debt by the amount of the current period’s deficit. Implementing long-term fiscal sustainability will ensure government tax and spending policies are aligned, which eliminate an increase of the national debt every period. Therefore, the long-term fiscal sustainability is critical for today’s economic growth because it reduces the government’s borrowing.
However, failure to present a credible plan for balancing the government’s budget in the long-run will affect private business investment. This is so because it will lead to an increase in government borrowing in order finance its entitlements, which are ever increasing. As a result, private business investments will diminish threatening the ability of the economy to grow and generate opportunity. The increase of the government borrowing will end up overcrowding private investments. This is so because government borrowing indirectly affects the incentive to invest via its effect on the equilibrium interest rate.
The equilibrium interest rate is determined by the interaction of demand and supply of loanable funds. The demand for loanable funds consists of two items. These include government demand for funds to finance budget deficits and private sector demand for funds to finance investment projects. Therefore, an increase in government borrowing will lead to an increase of interest rate, which will reduce the quantity of funds demanded by the private sector. Therefore, failure to use long-term fiscal sustainability will increase government borrowing which will shifts the demand for loanable funds to the right. This will result in crowding private business investment because demand is low compared to supply of investment.
On the other hand, the supply of loanable funds represent the total net amount households are willing to lend and capital inflow from abroad based on nominal interest rate. Therefore, failure of implementing a credible plan will increase supply of loanable funds resulting in greater quantity of investment. This is so because government budget deficits causes the demand for loanable funds to shift to the right and supply for loanable funds to shift on the left.
In a recap, long-term fiscal sustainability is important for economic growth because it reduces the government borrowing which increase investments. It protects investment funding which promote the economy’s ability to support a healthy citizen. The fact that an increase in investment can crush entitlement spending is a good sign for economic growth.