Fiscal policy

There are people who all the time yap about fiscal policy and fiscal deficits. What is that? Today, you can read about it in this blog. Oh yeah, it's going to be interesting.

There are two main ways by which the government manages the economy Fiscal policy and monetary policy, two big names, right, but, today we can read about only one, you can read about the monetary policy later.

Fiscal policy is about the decision govt make regarding income(tax) and expenditure(spending), something like your parents or big business do regarding the budget, but when govt do, we call it fiscal policy, double standards right.

Govt needs to ensure that its spending is in line with the spending income, and then when the government expenditure is more than the income of the government it causes a deficit which is called a fiscal deficit,  if not then, there is a need to borrow the money or sell the assets, imagine your parents has to take loan to send you to big university or start a business  which is beneficiary for the economy but it is not done correctly or because of some external factors which can cause problems

The government earns money mainly by collecting taxes such as income tax, sales tax, and corporate tax, and they should pay taxes, because it helps to spend the money on different services, including police and education. The government also transfers money to senior citizens and the unemployed, and it invests in and projects bridges and airports.

Govt make decisions based on where the economy is in the economic cycle there is recession and unemployment in the country so govt does investment projects like making bridges, and hospitals and provides tax cuts which increase spending in the country, which gives employment opportunities in the  country which helps to create the high income in the country which leads to more aggregate demand which can lead the increase the inflation 2% please note inflation is not bad it just has to be maintained nearby 2% which is just a sweet spot like a beach on Sunday wallah and bash the recession  

This is called expansionary fiscal policy where govt increases the govt spending and reduces taxes which helps create better employment opportunities and increases the income in the economy this is called the multiplier effect in the economy

Please note if govt spending when there is full employment or voluntary employment nearby that, it can create inflation in the country since aggregate demand is high which will push the prices  

In the contractionary fiscal policy, Government reduces the govt spending and increases taxes which slows down aggregate demand.

This means govt have to analyse the country well to increase its potential of the country and increase the GDP through the policies

Govt borrowing

When govt is in deficit in the budget and in the economy it has to borrow the money by issuing the bond and selling the securities.

When govt issues a bond, it has to pay the interest which is a fixed payment burden for the government that is why many alliance has some standards to follow.

there are some bodies that say there is a limit to the deficit a government can have. Here are some examples:

1. USA: 30% of the GDP- Why not aim for the stars (and the moon) when it comes to spending?

2. EU: 3% of the GDP - Keeping it modest, like a student on a budget.