Fiscal Policy
Dr Akhlas Ahmed
Lecture # 4
@IBT City campus, Karachi
06.02.2017

Fiscal and monetary policy are
two major drivers of a nation’s
economic performance.

Through monetary policy,
a country’s central bank
influences the money supply.

Through fiscal policy, regulators
attempt to improve unemployment
rates, control inflation, stabilize
business cycles and influence
interest rates in an effort to control
the economy.

Regulators use both policies to
try to boost a flagging economy,
maintain a strong economy or
cool off an overheated economy.

What is ‘Fiscal Policy’?
Government spending policies that influence
macroeconomic conditions.

• Fiscal policy is largely based on
the ideas of British economist
John Maynard Keynes (1883–1946),
who believed governments could
change economic performance
by adjusting tax rates and
government spending.

• Fiscal policy is the means by which a
government adjusts its spending levels
and tax rates to monitor and influence a
nation's economy. It is the sister strategy
to monetary policy through which a
central bank influences a nation's money
supply.

• Fiscal policy refers to the
Revenue and Expenditure policy
of the Govt. which is generally
used to cure recession and
maintain economic stability in
the country.

• Why is the Fiscal Policy important?
• Fiscal policy is important because it regulates
government spending and taxation.
• Fiscal policy controls decisions made at the
local, national and federal government levels,
such as goods, services and products
purchased, appropriate levels of taxation and
government financial programs.

• Who enacts the fiscal policy?
• Expansionary Fiscal Policy –
• Policy enacted by the government that
increases output.
• Examples include lowering taxes and
increasing government spending.
• Expansionary Monetary Policy –
• Policy enacted by the Fed that increases the
money supply and thus increases output.

• Which is an example of fiscal policy?
• The two major examples of expansionary
fiscal policy are tax cuts and increased
government spending. Both of these policies
increase aggregate demand while contributing
to deficits or drawing down of budget
surpluses.

• Is our fiscal policy tight or lose?
• Fiscal policy is the use of government
spending and taxation to influence the
economy. ... Fiscal policy is said to be tight or
contraction when revenue is higher than
spending (i.e., the government budget is in
surplus) and loose or expansionary when
spending is higher than revenue (i.e., the
budget is in deficit).

• Instruments of Fiscal Policy…
• 1. Reduction of Govt. Expenditure
• 2. Increase in Taxation
• 3. Imposition of new Taxes
• 4. Wage Control
• 5.Rationing
• 6. Public Debt
• 7. Increase in savings
• 8. Maintaining Surplus Budget

• Other Measures…
• 1. Increase in Imports of Raw materials
• 2. Decrease in Exports
• 3. Increase in Productivity
• 4. Provision of Subsidies
• 5. Use of Latest Technology
• 6. Rational Industrial Policy

How is the Monetary Policy different
from the Fiscal Policy?

• The Monetary Policy regulates the supply of
money and the cost and availability of credit in
the economy. It deals with both the lending and
borrowing rates of interest for commercial banks.
• The Monetary Policy aims to maintain price
stability, full employment and economic growth.
• The Monetary Policy is different from Fiscal
Policy as the former brings about a change in the
economy by changing money supply and interest
rate.

• Whereas fiscal policy is a broader tool
with the government.
• The Fiscal Policy can be used to
overcome recession and control
inflation. It may be defined as a
deliberate change in government
revenue and expenditure to influence
the level of national output and prices.

How the government could try to
use fiscal policy to affect the
economy?
Consider an economy that’s
experiencing a recession.

Case study # 1:
The government might lower tax rates to try to
fuel economic growth. If people are paying less
in taxes, they have more money to spend or
invest. Increased consumer spending or
investment could improve economic growth.
Regulators don’t want to see too great of a
spending increase though, as this could increase
inflation.

Case study # 2:
Another possibility is that the government might
decide to increase its own spending – say, by
building more highways. The idea is that the
additional government spending creates jobs
and lowers the unemployment rate. Some
economists, however, dispute the notion that
governments can create jobs, because
government obtains all of its money from
taxation – in other words, from the productive
activities of the private sector.

One of the many problems with fiscal policy is
that it tends to affect particular groups
disproportionately.
A tax decrease might not be applied to taxpayers
at all income levels, or some groups might see
larger decreases than others.
Likewise, an increase in government spending will
have the biggest influence on the group that is
receiving that spending, which in the case of
highway spending would be construction
workers.

Fiscal policy is the means by which a
government adjusts its spending levels and
tax rates to monitor and influence a
nation's economy. It is the sister strategy
to monetary policy through which a central
bank influences a nation's money supply.
These two policies are used in various
combinations to direct a country's
economic goals. Here we look at how fiscal
policy works, how it must be monitored
and how its implementation may affect
different people in an economy.

Before the Great Depression, which lasted from Sept. 4,
1929 to the late 1930s or early 1940s, the government's
approach to the economy was laissez-faire.
Following World War II, it was determined that the
government had to take a proactive role in the economy
to regulate unemployment, business cycles, inflation and
the cost of money.
By using a mix of monetary and fiscal policies (depending
on the political orientations and the philosophies of those
in power at a particular time, one policy may dominate
over another), governments are able to control economic
phenomena.

How Fiscal Policy Works
Fiscal policy is based on the theories of British economist
John Maynard Keynes. Also known as Keynesian
economics, this theory basically states that governments
can influence macroeconomic productivity levels by
increasing or decreasing tax levels and public spending.
This influence, in turn, curbs inflation (generally
considered to be healthy when between 2-3%), increases
employment and maintains a healthy value of money.
Fiscal policy is very important to the economy. For
example, in 2012 many worried that the fiscal cliff, a
simultaneous increase in tax rates and cuts in
government spending set to occur in January 2013, would
send the U.S. economy back to recession. The U.S.
Congress avoided this problem by passing the American
Taxpayer Relief Act of 2012 on Jan. 1, 2013.

Class activity:
Talk about fiscal and Monterey policy…
Time limit: 05 minutes each.

QUIZ # 4 (6.2.17)
Q1. How you describe the fiscal policy
of Pakistan?
Assignment # 4
Q1. Make a chart and compare fiscal
policy with monetary policy.