Detailed Examination of US Fiscal Policy and Economic Impact 2007-2017

This report provides an overview of the fiscal policies implemented in the United States between 2007 and 2017, a period marked by the Global Financial Crisis. It examines the shift from neo-liberal policies to expansionary fiscal measures, including increased government spending and tax cuts, aimed at stimulating the economy. The analysis explores the impact of these policies, such as the use of near-zero Federal Fund rates and quantitative easing, and their effectiveness in fostering economic recovery, including GDP growth and changes in national debt. The report also discusses the shift in policy during the Trump administration with greater tax cuts, and their anticipated effects on the budget deficit and GDP. The report references key sources such as the World Bank, Federal Reserve Bank of Cleveland, and the Congressional Budget Office, providing a comprehensive understanding of the US fiscal landscape during this critical decade.

Overview of the Fiscal Policy Between
2007 and 2017
It has been widely acknowledged that the Global Financial Crisis hit the USA in December 2007. The USA
has been a country that has handled handled the Global Financial Crisis well and seems to have achieved
a spectacular recovery. (Organization for Economic Co-operation and Development, 2016) The reasons
for this spectacular recovery can be attributed to the monetary and fiscal policies that followed the
crisis.
The US Government , generally, followed neo-liberal policies since1980s. Neo Liberal policies imply that
there is a tendency towards market de-regulation and limited government controls and lower public
spending by the governement. (Brown, 2003) However, the real Discretionary spending of the USA
government in the economy, also, continued to grow at an average rate of over 3%. Government
spending dipped slightly during the few years prior to the financial crisis of 2007. (Federal Reserve Bank
of Cleveland, 2015). The Crisis forced the USA to adopt near zero Federal Fund rates and help increase
the money supply within the economy by way of quantitative easing. (Tyson, 2013) The Fiscal policy also
followed an expansionary path i.e it allowed for greater spending by the government in the economy
and tax cuts for people. The idea was to increase the money supply within the economy and provide a
stimuls to wages which in turn would keep the consumer spending high. (Rich, 2013) For the first two
years, the policy seemed to work as the rate of growth of GDP within the first year of the crisis seemed
to be the same as the rate of growth within the first year of recovery during the great Depression.
(Tyson, 2013) Fiscal policy seemed to be very important since it was observed that the multiplier effect
of the fiscal policies seemed to be greater than the multiplier effect of the monetary policy. (Auerbach,
2009)
The impact of this policy began to fizzle in the year 2011. One of the reasons cited for the low increase
inoutput and GDP was the high level of national debt which seemed to have been affecting growth. This
was attributed to the “crowding out” effect that high government debt may have had. High government
debt may have inhibited the private investment within the economy. However, there is no strong

evidence to corroborate this theory, so far. (Tyson, 2013) The expansionary policy remained in place ,
even during the post crisis period i.e post 2009.
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0
20
40
60
80
100
120
Government Debt as a % of Total GDP
Graph 1 Budget Deficit of USA since 2007
Source: (The World Bank, 2017). Prepared by Author
The US economy has rebounded since the supposed end of the recession in 2009. The National Output
surpassed the pre-crisis national output level by approximately 10 %. Wages in the private sector and
corporate profits seemed to be high , while fiscal stability seems to have been restored. (Organization
for Economic Co-operation and Development, 2016)
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
-4
-3
-2
-1
0
1
2
3
4
Annual GDP Growth Rate (%)
Annual GDP Growth Rate
(%)

Graph 2 GDP Growth rate of USA since 2005
Source: (The World Bank, 2017) . Prepared by Author
In 2017, the Trump administration in the USA announced greater tax cuts for the corporate sector , with
the hope that greater tax cut would fuel investment demand , raise the employment rates as well as
wages and , in turn, would increase the national output. (Kottasová, 2018) However, the tax cuts are
expected to also, raise the national budget deficit as well as shrink the GDP by 2,6% to 3.3 % in the next
decade. (Congressional Budget Office, USA, 2017) It is to be seen how the new fiscal policy plays out.
Bibliography
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https://www.federalreserve.gov/faqs/money_12845.htm
Brown, W. (2003). Neo-liberalism and the End of Liberal Democracy. Theory & Event .
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https://www.cbo.gov/publication/52846
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trends/et-20150714-us-fiscal-policy-recent-trends-in-historical-context.aspx
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economy/index.html
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The World Bank. (2017). Central government debt, total (% of GDP). Retrieved January 31, 2018, from
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the-recession/