Economic and Budgetary Policy

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Economic and Budgetary Policy
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Outline

• Goals of economic policy
• economic growth, stable prices, low unemployment,
  positive balance of payments, management of
  deficits and debt
• Instruments of economic policy
• fiscal policy, monetary policy, others
• Tax policy
• Budget process
• Budgetary actions and challenges
• Focused discussion Addressing the Deficit

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Importance of Economic Policy

• Economic policy is
• a central concern of government
• a byproduct of many other policies
• impacted by other government policies

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Goals of Economic Policy

• Economic growth
• Full employment
• Stable prices
• Positive balance of payments from international
  trade
• Management of deficits and debt

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Economic Growth

• Larger quantity of goods and services in each
  subsequent year
• Impacts
• tax revenues increase
• aids in the redistribution of resources
• A zero-sum society
• occurs when little growth
• no program gains or
• resources from one taken to give to another
• redistribution of wealth causes more conflict

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Full Employment

• Jobs can substitute for social welfare programs
• Unemployment influences budgets
• loss of government revenue
• increase in government expenditures
• Unemployment not distributed evenly, e.g., by
  race and age
• African Americans and young Americans are
  disproportionately affected
• Change in job sectors (different jobs, more
  two-income households)

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Low Levels of Inflation

• Inflation an increase in the cost of goods and
  services
• affects all citizens
• The performance of the U.S. in stabilizing prices
  has been good
• Measured by Consumer Price Index
• represents average change in price over time of a
  variety of goods and services

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Positive Balance of Trade

• U.S. has generally had a negative balance of
  trade
• Does it matter?
• implies a countrys products are not competitive
  w/ other nations products
• key industries
• equity and fairness of trade
• Maybe not
• would a nation trade if it was detrimental?
• trade is efficient (comparative advantage)

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Managing Deficits and Debt

• Difference between deficits and national debt
• Need to pay interest on debt
• Impacts of deficits and debt
• borrowing by govt limits supplies of funds
• increase in interest rates
• forego other programs

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Interrelationship of Goals

• Attempts to affect one goal can affect another as
  well
• For example
• inflation and unemployment
• economic growth and inflation
• deficits and growth

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Tools of Economic Policy

• Fiscal policy
• Tax and spend policies used by government to
  achieve economic goals
• for example, if the economy is in a recession,
  the government should run a deficit
• Changes in taxing and spending decisions
• Presidential concern, but needs involvement by
  Congress
• Supply-side economics

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Tools of Economic Policy (contd)

• Monetary policy
• Importance of the money supply in controlling
  economic fluctuations
• increasing the money supply can stimulate the
  economy (lowers interest rates, easier to borrow,
  etc.)
• Performed by the Federal Reserve Board
• independent of presidential and congressional
  authority

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Tools of Monetary Policy (contd)

• Three major tools
• open-market operations
• changing the discount (interest) rate
• changing the reserve requirements
• The lack of coordination between fiscal and
  monetary policy can cause the two actions to
  cancel each other out.

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Other Tools

• Regulation
• not an explicit economic policy, but can affect
  the economy
• enacted to convey benefits
• Incentives, subsidies, and support
• tax breaks, corporate welfare

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Tax Policy

• Tax policy process of raising enough
• revenues to meet expenditure demands
• Extremely political
• U.S. taxes low compared to other developed
  nations
• Different means of raising revenues have
  different economic and political effects
• Regressive vs. progressive taxes

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Choices in Tax Policy

• Collectability
• Fiscal neutrality
• Buoyancy
• Distributive effects
• Visibility
• Horizontal and vertical equity

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Budgetary Process
Assumptions And Planning
Agency Budget Development
OMB Budget Review
Budget Control
Congressional Review
Budget Execution
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Budgetary Policy Action

• Reagan and Bush tax cuts
• Focused on the wealthy
• Increasing deficits
• Responses to the deficit
• Gramm-Rudman-Hollings Act
• Budget Enforcement Act

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Economic Issues and Challenges

• Maintaining economic growth
• Growth of entitlements
• entitlements legal obligations created through
  legislation that require the payment of benefits
  to any person who meets the eligibility
  requirements
• increases in entitlements mean that other
  programs must take budget cuts
• difficult to cut requires hard political
  decisions
• Challenges for state government

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Focused Discussion Addressing the Deficit

• Examine the economic, political, and equity
  issues of the following choices
• Decreasing entitlement expenditures
• Decreasing discretionary expenditures
• Increasing revenue