Failure of Activist Fiscal Policy †Free Samples to Students

Question: Discuss about the Failure of Activist Fiscal Policy. Answer: Introduction: Unhealthy food habit of people exerts additional cost on government by raising the cost of health services. Therefore, steps are taken by government in different countries to shift the food habit of people from unhealthy to a healthy one. Many countries have already imposed tax on sugary foods as they lead to diabetes and cause obesity (theconversation.com 2017). Apart from taxing the unhealthy products, the healthy products such as fruits, vegetables and dairy products should be subsidized to encourage people to include them in their diet. However, effectiveness of tax and subsidy policy depends on the elasticity of products. The estimated elasticity of for high calorie fruit and vegetables are -1.128 and low calorie dairy products is -1.972. When subsidy reduces the price the people raises their demand more than price rise. For products like high and low calorie sweet and sugary snacks, demand is inelastic and measures -0.270 and -0.295 respectively. Tax on this product means a greater taxation burden on buyers and hence reduces demand for these products. The simple idea is that during economic depression government can stimulate private spending and boost economic activity. J. M. Keynes was is favor of governed intervention in the economy. Government intervention in the economy is described with fiscal policy tool. When government reduces tax rate the people have more disposable income to spend and this spurs private consumption spending which is a major part of aggregate expenditure or demand. Similarly, government can raise its spending in different areas that indirectly assist private spending (cis.org.au 2017). The idea of fiscal stimulus has received particular appeal during depression years off 1930. This is the time when identity of central bank and monetary policy was not come into force. Automatic changes in the fiscal position indicates changes that occur in the government budget without active intervention of government. During recession, income of the people declines because of contraction of economic activity. When income reduces, then people pay less taxes and this reduces government tax revenue affecting the budget. Additionally, autonomous changes occur in the expenditure as greater number of people come under different government program. Discretionary fiscal changes are those undertaken by the government in times of high inflation and economic recession. For example, during recession government increases their spending to give stimulus to aggregate spending. Change in the tax rate also comes under discretionary policy changes. In times of recession, government spending raises and tax revenue reduces moving budget towards a deficit. The policy of fiscal contraction is taken in times of high inflation with the objective the contracting demand. Fiscal contraction is taken in the form of raising tax rate or cutting government expenditure. However, cut is government spending for wasteful expenditure has an opposite impact. This form of fiscal contraction contributes to private investment crowd that increase national income (cis.org.au 2017). The improvement under this policy is realized in terms of a low interest rate. This accelerates investment because of the reduced cost of investment and give stimulus to national income. A related consequence of this policy is to strengthen the exchange rate and contributes to an improved trade balance. Monetary policy works with the tools of money supply and interest rate. In times of economic contraction, expansionary monetary policy can be undertaken. This policy is implemented in the form of a cut in the interest rate. In the money market, interest rate is the cost of borrowing and investment. With lower interest rate, this cost is reduced and raises investment. In this way, monetary policy is used to create economic stimulus. Monetary policy is more influential for expansion of financial sector. The strong financial sector of Australia has heavy reliance on foreign borrowing. The external borrowing in the economy is channeled via the banking sector and meets the domestic investors demand (cis.org.au 2017). In such economy relying on financial sector, monetary policy is more effective. References Cis.org.au. (2017).Fiscal Fallacies : The Failure of Activist Fiscal Policy. [online] Available at: https://www.cis.org.au/publications/policy-forum/fiscal-fallacies-the-failure-of-activist-fiscal-policy/ [Accessed 27 Oct. 2017]. The Conversation. (2017).Why the government should tax unhealthy foods and subsidise nutritious ones. [online] Available at: https://theconversation.com/why-the-government-should-tax-unhealthy-foods-and-subsidise-nutritious-ones-72790 [Accessed 27 Oct. 2017].