Fiscal Policy Analysis: Government Spending and Economic Growth

This report provides a comprehensive analysis of fiscal policy, focusing on its role in managing a nation's economy through taxation and government spending. It delves into counter-cyclical fiscal policies, exploring their challenges and limitations, and examines the impact of government actions on market demand, economic growth (GDP), and various tax types. The report includes a case study on Irish government fiscal policy, evaluating its expenditure and the effects of currency fluctuations and recession. It also discusses the criticisms of fiscal policy, such as the disincentives of tax cuts, side effects of public spending, poor information, and time lags, along with the challenges faced by governments in implementing counter-cyclical strategies. The report references economic concepts like the multiplier effect, crowding out, and monetarist critiques, offering insights into the complexities of fiscal policy and its effects on macroeconomic stability. This report is available on Desklib, providing students with valuable insights into economic principles.

FISCAL
POLICY

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Counter fiscal policy:.............................................................................................................3
Counter-cyclical fiscal policy challenges faced by Government...........................................7
CONCLUSION................................................................................................................................9
References:.....................................................................................................................................11

INTRODUCTION
Fiscal policy is the policy of the government that deals with the management of the
monitory issue and balance of the nation. The fiscal policy direct acts on the taxation and
spending from the resources of the government. These policy directly act on the macro
environment which in turn develops a a working condition for businesses and prices of the goods
and services inside the nation. This policy is a reflection if the income and expanses of the nation
and directly informs the population of the primary concerns of the government. The government
increase and decrease the taxation on the product to manage the earning of the government and
sustainability of the market (Guerguil, Mandon and Tapsoba, 2017). This report is the analysis of
the fiscal policy of the in the context of the government. This report further analysis the
efficiency with which the government has used the fiscal policies for to create a balance in the
market.
MAIN BODY
Counter fiscal policy:
Fiscal policy is about the monitory management of government in terms of the
nationwide market. Changing the taxation and further the prices of the product is one of the main
reason to manage the economic growth and flow of the market. Economic growth is reflected in
the form of GDP of the country. GDP is the gross domestic product that is the clearly depicts the
monitory value involved in the transaction of a nation it also through the economic development.
Fiscal policy is used to manage the demand and to increase economic activity of the market.
There are many key points that are involved in the working of the fiscal policy, through the fiscal
policy the objective of the government is to make the market relaxed for the growth and working
of the nation. The fiscal policies effectively control the rate of the basic items in the market. The
taxations applied by the government are a result of well researched and developed move of the
government to either increase or decrease the market demand the revenue that eh government
itself is generation from the market. Fiscal policy clearly manages between the allowance offered
by the government for the people of the country as the lower the government applies tax on the
products and services the lowers will be its prices and according the higher the taxation the
higher prices (Akitoby, Honda and Miyamoto, 2019). The objective of the government is not just

to increase or decrease the prices but also to adjust and manage the economic activity of the
taxed market. There are different type of taxes involved in the fiscal policy as there are various
sources of earning of the government. Fiscal policy of a government is an effective to keep a
check and control over the tragedy in any particular market. Different type of taxes are V.A.T.,
income tax, road tax, service tax, municipality tax. All these taxes differ in their nature of being
applicable on the population. As there are multiple sliots people with different income and also
different sources of income as well. The government possess a ground understanding of the
finance the money making articles and based on the efforts or the easiness the governments sets
the tax rates (Akitoby and et.al., 2019). On the other hand some of the taxes like road taxes are
common for all the people in the country irrespective of the fact that how much the income of the
people differ. The taxation on import and export is also one of the factors that are included in the
fiscal policies. The government through the analysis of years of data understands and predicts the
type of the business that will be making maximum of the profit and thus the government implies
higher tax on such business, This is just a reflection of the mindset of the government to establish
a mutual profit and benefit condition as the businessmen and companies involved in high profit
making sectors earns well then so does the government. Irish government fiscal policy is being
presented below in diagram.

Irish government fiscal policy 1
By evaluation of the above diagram, it could be interpreted that, government of respective nation
i.e. Ireland, spent its expenditure in mainly social protection and also by dedicating some of the
spending in most important sector i.e. defence sector of the nation. By analysing the results of
the diagram shown above, it could be interpreted that, government of the nation had a very well
and a clear defined fiscal policy, which at the end ended at a good note by providing country
with all the needful and also protecting the company in terms of currency value in the
international markets.

1 Gareth Fitzgerald for counter cyclical fiscal policy, Irish times November 30th 2002
As per the above diagram which shows an increase in value price of dollar rates after 2000. It
could be analysed that net exports of the nation showed a great downfall, as due to increasing
demand of various goods in the nation with context to total number of production done in the
region. Because of nit fulfilment of demands of various individuals in the country, it lead to
origination of recession in the country which impacted the total exports and ultimately end up
increasing value of nation currency in international market of imports and exports.
Gareth Fitzgerald, Duffy and Smyth (2000) embraced a comparable investigation of the
affectability of the Irish economy to repeating aggravations. Their decision was practically
indistinguishable to that of van nook Noord for the wide OECD zone. For each one percent
decrease in the development rate beneath potential, the public authority excess would fall by 0.5
percentage points of GDP. This would infer that, given the spending plan were kept up in
balance over the cycle as needed under the Stability and Growth Pact, there would be no risk of
the public authority being compelled to make a procyclical move to cut the deficit, as occurred
during the ineffective endeavours to get the monetary emergency levelled out in the mid-1980s.

Most likely the greatest peril to the Irish economy lies in the chance of a significant recession in
the US, in light of the fact that the Irish cycle is all the more firmly identified with that of the US
than is the situation for other EU individuals. Nonetheless, the flow strength of the public
finances leaves Ireland safer even with outer stuns than whenever in the most recent thirty years.
Regardless of whether there was a downturn in Ireland, almost certainly, the budget would stay
in excess, leaving space for countercyclical activity to be taken. Overall, at that point, we reason
that in the current budgetary circumstance the Stability Pact is unlikely to compel the public
authority into improperly favourable to repeating activities.
Counter fiscal policy as we discuss it is about process takes by government for direction
for business cycle. Pro cyclical fiscal policy, the government reinforce which business cycle by
being expansionary for better times & contraction during recession. It could be raise
macroeconomic volatility which depress investment in real & human capital, hamper growth &
harm the poor which says by economists. Counter fiscal policy works by various channels. It is
about expansion in government spending which alters the contraction in output by setting the
decline for consumption & investment (Chrysanthopoulou and Sidiropoulos, 2018). Higher
government spending builds increase confidence when it needs. By this policy, government are
able to show its commitment which sound fiscal management, it said by survey. This policy
gives confidence to private sector which the economy will not fluctuate more. It helps
businessman for overcome risk & gives animal spirit in economy. Fiscal policy has opposite of
countercyclical since 2010. This means the government has sought for reduce the deficit by
cutting government spending, at least which reduce government spending growth. There are
some of the limitations in the fiscal policy that sometimes hinder the market growth. Political
interest and pressure counter the fiscal policy and becomes a criticism facing subject due to the
following factors.
Criticism of fiscal policy
Disincentives of tax cuts: Increasing of tax from the government leads to increase in
prices which has a direct impact on the demand of the resulted product in the market. The higher
the taxes on the objects the lower the demand which in turns disrupts the entire working structure
of that particular sector and has a negative impact on the people associated with it.
Side effects for public spending: The increased taxes from the government results into
the decreased spending from the people which in turn decreases the cash flow in the market, Due

to this decresed cash flow there is a decrease in the econmomic acticty and hecen a negetive
effect is observed in the market
Poor information: Fiscal policy will suffer about government which has poor
information. For example, the government knowns there is going to recession which will
increase aggregate demand, the government action which is taken by it cause inflation.
Budget deficit: Expansionary fiscal policy will increase the budget deficit which has
adverse effects. Higher budget deficit will needs higher tax for future which may cause for
crowding cut.
Monetarist critique: It debate that in context to LRAS is inelastic therefore an increase
for aggregate demand will cause for inflation more. This is generally sceptical for fiscal policy
which tool for boost economic growth.
Time tags: The government has plans for increase spending which can take large time to
recycle economy, & it may more lately. Spending which government is plans only set once a
year. There is delay for implementing changes which are related to spending patterns.
Disincentives of tax cuts: Expanding charge for lessen total interest reason disincentives
to work, on the off chance that it occurs, there will be succumb to profitability and total stock
fall. It is about higher duty excessive decrease impetuses to work, pay impact rules the substitute
impact.
Various components for aggregate demand: The public authority utilize monetary
approach, its adequacy will needs depend for different components of total interest. For instance,
if buyer certainty is exceptionally low, for this way decreases duty may not lead for expansion in
shopper spending.
Depends on the various effect: Change for infusions may build the multiplier impact,
accordingly the size of the different multiplier will be vital. Clients save more pay, the multiplier
impact will be lower and monetary strategy has less viable.
Crowding out: Expansionary monetary approach for expanded government spending which
increment total interest which may cause swarming out, when it happens when it increment
government spending results for decline in size private area. For instance, if government expands
it's spending for overseeing balance it needs to build charge and sell securities and acquire cash,
these the two strategies lessen private venture. On the off chance that this happens, total interest
not increment and if increment, increment low (Guerguil, Mandon and Tapsoba, 2016). Old style

financial experts banter that administration has more wasteful going through cash than private
area, there will be decrease monetary government assistance. Increment government getting put
more pressing factor for loan fee. For acquire more cash the financing cost for bonds may has
risen, which cause for more slow development for the economy.
Real business cycle critique: Business cycle which banter macroeconomic variances which
are because of changes for innovative advancement and supply side. Utilizing request side
approach for impact financial development for address the issue (Misra and Ranjan, 2018).
Counter-cyclical fiscal policy challenges faced by Government
As, discussed in the above analysis that Counter-cyclical fiscal policy is the one policy
where government is required to bring an increase in its spending to mark a considerable revival
in the economy which has been facing the economic crisis. The initiatives taken by government
in this regard are not that handful for the government and bring enormous challenges to its
governance of economy. Some of the most obvious challenges faced by the government are
discussed in the report.
Increased spending of Government- When government makes expenses to revive business
sentiments in the country, it creates a burden over the exchequer of the government. Every
government around the world have limited resources at its disposal, to spend over the various
projects that are already pending in the line, and are required to complete and also some new
projects that are to be started for public welfare. The government resources are already burdened
by this along with many other revenue expenses, such as salaries, emoluments and interest
payments (Bonam and Lukkezen, 2019). And, when under expansionary fiscal policies are under
taken, stress over reserves rises to tantamount.
Increased Debt- Under the expansionary fiscal policy or Counter-cyclical fiscal policy, fiscal
resources of government are sometimes seen washing away very frequently. Therefore to
continue the spending on this policy and other expenses of government as well, government is
required to make borrowings from other Nations and International bodies like IMF and World
Bank. Hence, Debt level of government increases (Dynan and Elmendorf, 2020). Now, since
debt of government is increased which sooner or later, government will be repaying, that is again
will be financed out of government assets and reserves, and stress over resources will again
increase. To meet this stress, more b borrowings will be made and that will again lead to stress
over the resources. In this way, government can be seen falling under never ending trap, where

current policies are levying over the resources and to meet this stress borrowings are being made
which are again generating stress over the resources.
Political Dilemma- Governments around the world are made up of the representatives of people,
a principle that is the soul of democracy, and the method that channelize this process of
democracy and enables political representatives to become government is called politics. Politics
is just not limited to forming government but also continues on the aftermaths of forming
government. Hence, in every work done by government towards the welfare of public and
society as a whole, will affect political interests and generate political opinions as well. These
political opinions sometimes comes as the biggest hurdle to Government policies and do not
allow required developments to be made as per the planning. These hurdles can be in the form of
seeking clearances over making spending and also in the manner of proper implementation of
government plan (Keita and Turcu, 2019). Availing clearances for budgetary spending is
acquired from Houses of Government representatives and where people with sheer political
interests are present.
Increase in Welfare projects- Counter-cyclical fiscal policies are bought at the time when
economies are facing the biggest economic crunch of the time and Government interventions are
required the most. Sometimes, it can be clearly seen that government starts making targeted
solutions where problems of a specific community are settled to solve through targeting by a
particular project or task. Now, in a country there are numerous people that fall in various
segments and sections of society, each of them have their own problems. They all are seen
looking at the government for bringing last resort solutions and government is bound to help out
these people. This calls for increase in welfare projects, each project in the implementation
differently for different sections of society and for different problems as well, such as health,
food, employment, income levels, housing and many more (Alfaro and Kanczuk, 2017). This
indicates that various project will be functioning simultaneously under the government.
Management of these projects necessitates three basic needs by government that is Funds,
Functions and Functionaries. Government that is already in the stress of resources will be
compelled to look after each of these projects with same attention. All these repercussions that
are bought by Counter-cyclical fiscal policy ultimately leads to exorbitant stress of government
resources and affects the capabilities of not only government functioning but also the stability of
governance in the long run.

Looking at the above discussion, it can be evaluated that Counter-cyclical fiscal policies
cannot be made up as the primary solution but should always be the solution of last resort. It
should be bought by the government in heavily compelling circumstances, such as COVID-19.
Otherwise, in general circumstances people should be encouraged to bring up solutions to
economical and societal problems, through Pro-Cyclical policies.
CONCLUSION
From the above analysis of report it could be concluded that, in order to control government
spending and for regulating expenditure in respective projects being executed towards betterment
of the particular nation society fiscal policy is being adopted by the government of respective
region. It is an inclusion of how much government is willing to spend in the desired areas and
have the ability to perform such activities. With addition to that, this report is also an inclusion of
counter fiscal policy in which various modifications and strategies are being developed by
governing body of the respective nation for countering with certain trends and fluctuations in the
nation’s economy. Moreover, this document highlights various sources of information which is
to be extracted by the government to determine the best suited fiscal policy which is to be
regulated in the respective nation. Government spend for education sector for it which increase
tax income which helps for better performance which helps for higher profitability for the
businesses.