A selection of revision notes on fiscal policy

The handling of fiscal policy is one of the big macroeconomic issues of the year and one that is likely to dominate many AS and A2 macro essays in the exams this summer. Here is a selection of our recent blogs on aspects of fiscal policy during the last twelve months together with some brief revision notes on fiscal policy and its impact on the real economy.

Select the blog resources from those listed below - see related articles

Evaluation points on fiscal policy

The big fiscal issues this year have centered around the growing size of the budget deficit and the national debt. Sovereign debt is now a major problem for many developed nations; many have used Keynesian fiscal stimulus policies to boost demand and output during the financial / economic crisis. And now they must make a tough call on when and how quickly to start drawing back and remove some of the stimulus to demand created by running large fiscal deficits.

The hands of policy-makers may be tied by the financial markets themselves. Bond market vigilantes have already exerted huge pressure on many EU nations - notable Greece, Ireland, Spain and Portugal. In the case of Greece the EU was forced into negotiating an enormous bail out in partnership with the IMF and it remains to be seen whether Greeks will be prepared to tolerate years of fiscal austerity as part of a package to bring down state borrowing to a more sustainable level. A partial or whole-scale default on loans looks probable in the years ahead and so too does a partial break-up of the sixteen nation single currency area.

Apart from government borrowing issues there are many other fiscal policy issues on the agenda and each has plenty of scope for economic analysis and evaluation at AS and (especially) at A2 level. Here are some examples;

1/ Using fiscal policy as a means of improving supply-side performance - for example changes in corporation tax, tax and welfare reforms to improve work incentives
2/ The use of fiscal policy for environmental targets - for example the ongoing debate about carbon taxes as an approach to reducing C02 emissions
3/ The extent to which fiscal policy can and should be used to change the final distribution of income and wealth in the economy (i.e. as a tool of redistribution)
4/ The economic arguments for and against a shift in the pattern of taxes between direct and indirect taxes - I blogged recently about proposals for a progress consumption tax
5/ The extent to which fiscal policy is now an effective tool of macroeconomic demand management - especially at a time when the conventional use of monetary policy seems to have lost traction as a result of the credit crunch / financial crisis
6/ Fiscal policy and the challenges facing the single European currency. Who will bear the cost of the fiscal support package for struggling Euro Zone countries?