In the economics, fiscal policy is defined as the policy that is used to influence the economy by balancing the revenues and the public expenditures (Arnold, 2008). There may be different approaches to the fiscal policy that depend on the state of economy: expansionary (government spends more than it earns), neutral (when economy is stable) and contractionary fiscal policy (government receives enough taxes and can pay out its debts) (Arnold, 2008). In this paper, the U.S. fiscal policy will be analyzed in detail. To begin with, I will define what kind of fiscal policy the U.S. has been applying. Then the structure of revenues and expenditures and their dynamics will be analyzed. Next, I will look into the ways how the U.S. Government uses fiscal policy in order to increase the aggregate demand. Finally, the controversial issues of the current fiscal policy will be listed.
Analyzing various statistical data from the previous years, the U.S. fiscal policy can be described either as neutral or expansionary. The government always has to act very aggressively when the American economy faces a deep economic crisis or a recession. Such activity reminds the Keynesian policies that try to lift the aggregate demand by means of larger government spending and smaller tax revenues followed by the budget deficit and the national debt rise (Chafuen, 2015). For instance, six years ago after the recession broke out, public spending was significantly increased in order to stimulate the economy. The government had to implement a set of non-standard policies that would stop the economy from falling and make public spending an essential tool for the facilitation the development in the next few years. Several vital legal acts were passed, and despite the long lasting debate both parties in the U.S. Congress agreed to take the measures that targeted keeping taxes at the low level and simultaneous increase in spending so that the aggregate demand could be increased.
In Figure 1 one can see an extremely sharp rise of the total spending in 2009. Following the crisis, due to the economic growth and multiple budget cuts, the deficit was less than $500 billion in 2015. In 2014, just as in the previous years, most revenues were received in a form of individual income taxes and payroll taxes (Ritholtz, 2014). In turn, the revenues were for the most part spent to finance the health care system and support the work of the military industrial complex (Ritholtz, 2014). The 2014 budget deficit reached the very low level of less than 3% (Congressional Budget Office, 2015).
Figure 1
Total spending and revenue in 1992-2014 (billion dollars)
Source: Office of Management and Budget
In Figure 2 one can see that discretionary expenditures (defense and non-defense expenses) have been declining and mandatory expenditures (Social Security, Medicare, etc.) have been increasing in the past 40 years. Such trends and estimates represent a huge challenge for the American economy at all levels, because mandatory expenses will have to be covered by the larger volume of taxes or other sources of revenues. The people and companies will have to pay a lot more taxes if there is insufficient economic growth in the USA.
Figure 2
Discretionary and mandatory spending in 1962-2019
Source: Office of Management and Budget
As it was written above, increase of the aggregate demand for goods and services is one of the effects of the active fiscal policy (Weil, n.d.). It can be achieved through two channels. The government can increase its purchases and keep the taxes unchanged or it can cut the taxes and increase the transfer payments so that the households’ incomes could go up (Weil, n.d.). In Figure 3 one can see how the expansionary policy affects the aggregate demand. Y1 is the real level of GDP and Yp is the potential level of the GDP. The task of the government is to shift the aggregate demand AD1 back to the AD2 level by means of the larger spending and lower taxes.
Figure 4
Impact of expansionary policy
Both channels were used for the increase of the aggregate demand in the USA in 2009. Taxes were cut by 22% and $525 billion were poured into the budget within 1.5 years (Washington Post, 2009). Moreover, in 3 years the U.S. Congress took a decision not to increase the income tax rates for almost all Americans. As the result, the economic activity in the country improved, the unemployed found new jobs and in general more people started to earn the money. Increased consumption helped the companies to recover from the crisis. The Tax Policy Center (2015) describes the current tax system as progressive in which affluent people have to pay their taxes at a higher rate. In Figure 4 one can see that the federal tax rate for the various categories of people is different and depends on the income.
Figure 4
Federal Tax Rate in 2015
Source: Tax Policy Center
Despite some fundamental positive changes in the national economy, there are a lot of critics who state the public spending is too high and now the national debt is approaching $20 trillion dollars. In 2008 when Barack Obama became U.S. President the national debt was 8 trillion shorter. Financing this debt will become very expensive in the future. Moreover, many experts expect that the budget deficit may start rising again due to the ageing population and possible economic slowdown (Zumbrun & Timiraos, 2015). So the U.S. fiscal policy should be well-planned and take into account the future challenges mentioned above.
At the times of the economic crises or recessions, the government uses a much more expansionary policy than usual. In 2009 within the Stimulus, the taxes were reduced and billions of dollars were directed into the American economy. The taxes cannot be increased at the moment, because neither politicians nor the society are ready for it. So the key challenge for those who are responsible for the budget is to cut the expenditures as much as possible. The discretionary expenditures, including military expenses, have been reduced, but mandatory expenditures have been mounting. There have been several reforms in the health care, but according to the Congressional Budget Office, mandatory expenditures will still go up in the future. Therefore, the fiscal policy will have to be proactive in the next few years in order to support the economic growth in the USA.
References
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