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Fiscal Policy – Aggregate Demand and Aggregate SupplyIntroduction
In managing the economy, the government may opt to carry out a fiscal policy. Fiscal policy comprises of expenditure and taxes and at times borrowing by the government. Provision of public goods is a government’s duty. A public good is a good that the private sector fails to provide either because of the fewer rewards derived from such investments or simply because of the high cost of investment in such projects (Creel 2009, pg. 141). It is thus a role of the government ensure that the citizen enjoy these goods and services. In financing these projects, the government collects taxes. These projects thus contribute to the government’s budget in every financial year. The role of the annual budget by the government is to finance the government activities as well as achieving macroeconomic objectives. Government plans for expenditures, when the amount to spend is less than what taxes contribute, there is a budget deficit. To bridge that gap between expenditures and incomes from taxes and borrowing plays (Harris 2013, pg. 67). The government borrows by issuance of long-term bonds to private institutions and even other governments creating a national debt. In a situation where the taxes collected exceed the government expenditure, there is a budget surplus. Where a surplus occurs, the amount clears the national debt. Fiscal policy becomes contractionary where reduced government expenditure reduces the deficit. In a situation where a rise in government expenditure raises the budget deficit, it is an expansionary policy. This paper examines the fiscal policies that have been employed by the Brazilian government in the year and in the recent past and evaluates how the fiscal policies have affected the Brazilian economy to date.
Fiscal policy and Aggregate Demand
Fiscal policy, therefore, affects the spending pattern among individuals. A change in fiscal policy, therefore, changes aggregate demand and aggregate supply. Aggregate supply relates to total output in the gross domestic product as opposed to a single production. Aggregate demand relates to total imports demanded by a country (Langdana 2009, pg.73). Fiscal policy powerfully affects demand as well as output and employment. It is effective where the economy operates below full capacity and where the government requires stimulating demand. To control recession, increase government spending. In 2008, when the whole world was facing a recession the Brazilian government increased its spending by using the taxpayers money to build houses, electric plants and other infrastructure thereby shielding Brazil from the recession (Oliviera 2014). Increase in government spending assists in increasing amount of money in circulation. Consequently, the government needs to decrease taxes in order to increase aggregate demand. Decrease in taxes allows an increase in disposable income among the households whereas increased government spending increases amount of money in circulation (Harris 2013, pg. 231). The two methods increases aggregate demand and at the same time stimulates firms to produce more and employ more human capital thus increasing income that enables them to purchase more goods and services. These two methods of tax reduction and increased government spending refer to discretionary fiscal policy of the government to address recession. There was however slow economic growth after the recession in 2008 and the government resulted to tax breaks to jumpstart the economy (Oliviera 2014). During inflation, reduced government spending and increased taxation decreases aggregate demand. Increased taxation and reduced government spending reduces aggregate demand through reduction of disposable income thus discouraging households to buy goods and services. The government may also apply non-discretionary fiscal policy that includes transfer payments and tax systems as well as welfare benefits. These stabilizers decrease fluctuations in aggregate demand that arise from aggregate expenditure fluctuations.
Fiscal Policy and Aggregate Supply
On the supply side of the economy, fiscal policy takes an important effect since majority of government decisions aim at improving supply. During recession, a reduction in income taxes by the government improves incentives for individuals to look for work, in return aggregate supply increases. Lower taxes also enhance a positive effect on the workforce and labor productivity (Creel 2009, pg. 212). Consequently, through capital spending, the government increases aggregate supply. For example, infrastructure spending provides the required capacity for businesses to flourish. Tax reduction, especially corporate taxes attract investment from other nations and increasing aggregate supply in return.
Relating the Fiscal Policies to the Brazilian Government
Meeting fiscal goals is a challenge for governments both in the developed and developing nations. A case example is admission of by Brazil’s government last week that it won’t manage to hit important fiscal target for 2014 (Oliviera 2014). September 2014 government expenditure suggests a $25.5 billion primary deficit as opposed to corresponding figures of $45 billion surplus (Oliveira 2014). It is of much importance to reduce government budget deficit while still maintaining stability. These have been after the government has realized the slow level of development in the economic growth after the elections in Brazil where the incumbent president was re-elected (Oliviera 2014). Effective measures require reducing the deficit without causing other downturns. Cutting the budget deficit is essential in maintaining economic credibility in capital markets. Two years back, the Brazilian government changed means of achieving the fiscal target through one-time revenue as well as accounting tricks. Although the maneuvers were legal, they destroyed government’s credibility among investors. The maneuvers are a shortcut to attaining a fiscal policy leading to sustainability in the short term but unsustainability in the long run.
Increased spending by the Brazilian government rose to 13.2% while revenue attained 7.2% growth for the earlier months of 2014 (Oliviera 2014). It is an indication that government expenditures exceed the income. The amount of increased government spending is attributed to increased public spending by 34.1% (Oliveira 2014). Where the economy is stable, an increase in government spending on capital investments increases both the aggregate demand and aggregate supply. The result is healthy as the total potential output of an economy increases. Capital spending does involve not only infrastructure investment, but also human capital (Oliviera 2014). To ensure total increased output in an economy, investment on retraining and higher education is essential. In Brazilian case, if the government invested on genuine investment projects, an increase in the economy output should have been recorded. If the government increases spending on recurrent expenditures in a stable economy, it destabilizes the economy leading to inflation. An increase in government spending increases amount of money in circulation. In a stable economy, increased government spending destabilizes the economy in that an increase in amount of money in circulation increases aggregate demand leading to inflation.
Increased government spending on is essential during recession as it increases amount of money in circulation. Brazil effectively attained the objective of curbing recession by enhancing capital investments. These infrastructural developments increased both aggregate demand and aggregate supply leading to economic growth of the overall economy. Increasing government spending to curb recession is however not a tool to achieve economic growth in the long run. Once the crisis stabilizes, it becomes dangerous to continue using these tools. Brazil is accused of not rolling back the investment programs even after stabilization of the economy. It hence resulted to reduced economic growth forcing the government to try jumpstarting the activity through introduction of tax breaks as well as other measures (Oliviera 2014). Tax breaks are exemptions from paying taxes; they aim at increasing income of households and exempted companies (Creel 2009, pg432). In Brazil, the tax breaks reduced incomes as inflation crept in providing just a short term stimulus. In order to achieve political gains, governments change the figures of its expenditures as some analysts suspect is the case with Brazil. However, the approach is only sustainable in the short run.
Conclusion
In conclusion, managing the economy is the role of the government. Through effective use of the fiscal policy of aggregate demand and supply, efficient and economic growth is attainable. The Brazilian government has highlighted some of the best methods of maintaining economic growth through effective fiscal policies. For the development and growth continue the government should continue by employing the necessary measures.
References
Creel, J, 2009. Current thinking on fiscal policy. Basingstoke [England: Palgrave Macmillan, pp. 141, 212, 432
Harris, S, 2013. The new economics: Keynes' influence on theory and public policy. New York: Alfred A. Knopf, pp. 67, 231
Langdana, F, 2009. Macroeconomic policy demystifying monetary and fiscal policy (2nd ed.). New York: Springer, pp. 73
Oliviera, P, 2014, October 31. Deficit post in Brazil. Retrieved November 3, 2014, pp.21, 44, 45.
