FISCAL POLICY

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FISCAL POLICY

• What government can do for the economy

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Fiscal Policy and the Economy

• How does the President and Congress affect the
  economy?
• Control of tax rate.
• Proportional taxes (flat tax) say 5 of
  everyones income whether you or Bill Gates.
• Progressive taxes Richer should pay more.
  Luxury taxes.
• Regressive taxes Taxes the poor tend to pay
  more. Lottery tickets, cigarette taxes.

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Taxes

• Majority of revenue for the US is through income
  tax. 45.2
• Second is Social security taxes and
  contributions. 35
• Third is corporate taxes. 11

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Recession

• People have the money but dont spend it.
• Unemployment goes up.
• GDP slows.

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Fiscal Cures for Recession

• Change the tax rates.
• Puts more money in the economy for Consumption
  and Investment.
• Government Spending. Unemployment benefits,
  money for projects like roads, building
  improvements.

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Fiscal Cures for Recession

• Change the tax rates.
• Puts more money in the economy for Consumption
  and Investment.
• Government Spending. Unemployment benefits,
  money for projects like roads, building
  improvements.

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Problem of Fiscal Policy in 2006 The Deficit

• When government SPENDS (outlays) more than they
  TAKE IN (receipts) in taxes for the year
  DEFICIT.
• Projected 2006 deficit is around 300-billion.

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When a government increases spending and cuts
taxes

• DEFICIT!
• More outlays than receipts of money
• More going out than coming in.

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DEBT v. DEFICIT

• Deficit yearly budget problem
• Debt YEARS of deficit

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Current Debt????

• http//www.brillig.com/debt_clock/
• OR
• Google debt clock

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Projected Deficits According to the Congressional
Budget Office
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What is causing the deficit?

• Higher government expenditures
• Social Security / Medicare
• War in Iraq
• War on terrorism
• Government needs
• Lack of taxes being collected due to
• Too many tax cuts?

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How do we pay for the debt?

• US Savings Bonds
• IOUs for the government.

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Two Terms for Fiscal Policy

• Expansionary Policies
• Government policy actions that lead to increases
  in output
• Contractionary Policies
• Actions that government does that leads to a
  decrease in output

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Expansionary Policies

• Government lowers taxes and spends more to get
  people jobs and provide services.
• Increases debt
• Keeps voters happy
• More working means more we can tax

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Contractionary Policy

• To reduce the debt government either/or
• Raises taxes
• Reduces government spending.
• People lose jobs
• Govt. employees
• Govt. purchases
• People lose services
• Notice schools?

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What is Government to do?

• IF nothing is done, by 2020, 45 of taxes will be
  used to pay the interest off the debt.
• Where will money come from for medical research?
  Roads? Police? Etc?

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Nebraskas Situation?