GRP 4

Macroeconomics
Fiscal Policy
Presented to: Zunaira Khadim
Presented by: Aman Fatima
(SP23-BBA-014)
Maryam Rathore
(SP23-BBA-015)
1
Outlines…
 Introduction
 Definition
 Objectives
 Toolsand instruments
 Challenges and criticisms
 Conclusion
 References
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3
Introduction…
Definition:
 “Fiscal policy refers to the deliberate actions
taken by a government to manipulate its levels
of taxation and spending in order to influence
its economy.”
 This policy tool is employed to achieve
macroeconomic objectives such as stable prices,
full employment, and economic growth.
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5
Objectives of fiscal policy…
The primary objectives of fiscal policy are:
Full Employment: Fiscal policy aims to
stimulate economic activity to achieve full
employment or a level of employment where all
individuals who are willing and able to work can
find jobs. This involves using expansionary
measures to increase aggregate demand.
Price Stability: Fiscal policy seeks to maintain
stable prices and control inflation. Contractionary
measures can be implemented to prevent excessive
demand that might lead to rising prices.
‘”
Continue…
Economic Growth: The promotion of

sustained economic growth is a key objective. By
strategically increasing government spending on
infrastructure, education, and other productive
sectors, fiscal policy aims to contribute to long-
term economic development.
Income Redistribution: Fiscal measures,
such as progressive taxation and targeted social
spending, can be used to address income
inequality by redistributing wealth and resources
within the society.
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Continue…
Public Goods and Services: Governments

use fiscal policy to finance and provide essential
public goods and services, such as education,
healthcare, and infrastructure, contributing to the
overall well-being of society.
Long-term Fiscal Sustainability: Ensuring
the sustainability of government finances over the
long term is another objective. Fiscal policies
should be designed to prevent excessive
government debt that could lead to economic
instability.
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Tools and instruments…
Fiscal policy employs a variety of tools and instruments to
achieve its objectives. Here are the key ones:
 Taxation:
 Tax Cuts: Reducing tax rates can stimulate consumer
spending and business investments, boosting economic
activity.
 Tax Hikes: Increasing taxes can help control inflation by
reducing disposable income and curbing excessive demand.
 Government Spending:
 Public Expenditure: Increasing government spending,
especially on infrastructure projects, can stimulate economic
growth and job creation.
 Austerity Measures: Cutting government spending can be
used to reduce inflationary pressures and prevent excessive
government debt. 10
Continue…
 Public Debt Management:
 Debt Financing: Governments may issue bonds to
finance projects, impacting overall debt levels.
 Debt Repayment: Repaying or refinancing debt
can influence long-term fiscal sustainability.
 Fiscal Rules and Targets:
 Budgetary Rules: Governments may set rules to
guide fiscal policy, such as maintaining a specific
budget deficit or debt-to-GDP ratio.
 Fiscal Targets: Establishing specific targets for
revenue, spending, or deficits helps guide policy
decisions. 11
Continue…
 Investment Incentives:
 Tax Credits: Providing tax incentives for
businesses to encourage investments in research
and development, innovation, or specific
industries.
 Foreign Exchange Intervention:
 Currency Management: Governments may
intervene in currency markets to influence
exchange rates, impacting international trade.
12
Challenges…
 Time Lag:
 Challenge: There is often a significant time lag
between the implementation of fiscal measures and
their actual impact on the economy. This delay can
hinder the effectiveness of fiscal policy in
responding to rapidly changing economic
conditions.
 Political Considerations:
 Challenge: Fiscal policy decisions can be
influenced by political motivations, potentially
leading to suboptimal economic outcomes. Short-
term political considerations may conflict with the
long-term economic needs. 13
Continue…
 Global Interdependencies:
 Challenge: In an interconnected global economy,
fiscal policy measures in one country can have
spillover effects on others. Coordination among
countries may be needed to address potential
negative externalities.
 Inflexibility:
 Challenge: Once fiscal policies are set, they may
lack flexibility to adapt to changing economic
conditions. This inflexibility can limit the
government's ability to respond effectively to
unforeseen challenges. 14
Criticisms…
 Debt Concerns:
 Criticism: Persistent fiscal deficits can lead to
increased government debt. Excessive debt levels
may raise concerns about sustainability, potentially
leading to economic instability and limited fiscal
maneuverability.
 Crowding Out:
 Criticism: Increased government borrowing to
finance fiscal measures can lead to higher interest
rates. This, in turn, may crowd out private sector
borrowing and investment, limiting the intended
stimulus effect.
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 Inflationary Pressures:
 Criticism: Expansionary fiscal policies, especially
during economic upturns, can contribute to
inflationary pressures if demand exceeds the
economy's productive capacity. This challenges the
goal of maintaining price stability.
 Distributional Effects:
 Criticism: Fiscal policies may have uneven effects
on different income groups. For instance, tax cuts
may disproportionately benefit higher-income
individuals, exacerbating income inequality.
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Conclusion:
 Fiscal policy is a powerful tool in the hands
of governments, allowing them to steer the
economy toward desired outcomes. Its
effectiveness depends on careful calibration,
considering the unique economic
circumstances of each country.
 Striking the right balance between
expansionary and contractionary measures
is crucial for achieving sustainable and
inclusive economic growth.
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References:
 Anderson, B., & Minarik, J. J. (2007). Design
choices for fiscal policy rules. Available at SSRN
2004407.
 Bogolib, T. (2015). Fiscal policy as an instrument
of macroeconomic stability. Economic Annals-XXI.
 Huidrom, R., Kose, M. A., & Ohnsorge, F. L.
(2018). Challenges of fiscal policy in emerging and
developing economies. Emerging Markets Finance
and Trade, 54(9), 1927-1945.
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Macroeconomics

Economic Growth: The promotion of

Public Goods and Services: Governments

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