10 - FISCAL POLICY

Abstract

This chapter discusses the concept of fiscal policy. Restrictive fiscal policy can be used to combat inflationary pressure. In the face of inflation, a planned government surplus would be in order. The Keynesian analysis suggests that general economic conditions should be the prime determinant of a proper fiscal policy. An annual balanced budget might contribute to economic instability. When the economy is slack, budget authorities should plan a deficit. When the economy is experiencing an economic boom, a budget surplus is in order. Thus, the budget can be used to affect the conditions of private aggregate demand. Although Keynesian analysis indicates that discretionary fiscal policy can be an effective stabilization instrument, economists have begun to question whether it really is. Their pessimism stems from the asymmetric nature of fiscal policy. Tax reductions and spending programs are attractive to political entrepreneurs. In contrast, tax increases are unattractive. Politicians would be reluctant to follow this course. Therefore, in the real world, the Keynesian countercyclical medicine is not likely to be applied evenly.