Course : ECON6093 - Business Economics
Effective Period : March 2022
Fiscal Macroeconomics
Policy
Session 21
Thank you
Acknowledgement
These slides have been adapted from:
Essential Economic for Business 6th Edition
JOHN SLOMAN, ELIZABETH JONES
LEARNING OBJECTIVES
1.Distinguish the different between demand side policy
and supply side policy
2.Understand the impact of demand side and supply
side policy to equilibrium of aggregate demand and
aggregate supply
3.Point out the type of interventions in demand side
policy and supply side policy
Macroeconomic Policy
•
•
Demand-side policy
– fiscal policy
• changing government expenditure
• changing taxation
– monetary policy
• changing money supply
• changing interest rates (the approach today)
Supply-side policy
– market-orientated supply-side policy
• ‘freeing-up’ the market
– interventionist supply-side policy
• correcting market failures
The effects of fiscal and monetary policies
Price level
AS
Fiscal and monetary
policy attempt to shift
the AD curve
An expansionary fiscal
or monetary policy will
lead to higher GDP but
also higher prices
P2
P1
AD2
AD1
O
GDP1 GDP2
Real GDP
The effects of supply-side policy
AS2
Price level
AS1
Supply-side policy
attempts to shift the
AS curve to the right
P1
P2
AD
O
GDP1 GDP2
Real GDP
Fiscal Policy
•
The purpose of fiscal policy
– correcting a fundamental disequilibrium
– smoothing out fluctuations (‘fine tuning’)
– to affect the capacity of the economy
•
Government finances
– central government: budget deficits and surpluses
– public-sector deficits and surpluses
• financing a deficit
• public-sector net borrowing (PSNB)
UK public-sector net borrowing
10
Public-sector net
borrowing
Percentage of GDP (%)
8
6
4
2
0
−2
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
Notes: data exclude effects of financial sector interventions; data from 2019/20 are forecasts, figures are for the financial years beginning in each year show.
Source: Public Finances Databank, Office for Budget Responsibility (September 2019)
UK public-sector net borrowing:
actual and forecasts
Percentile
10
20
30
40
50
(median)
2008–09
6.9
2009–10
10.3
2010–11
8.7
2011–12
7.1
2012–13
7.2
2013–14
5.9
2014–15
5.0
60
70
80
90
2015–16
3.1
3.4
3.5
3.7
3.8
4.0
4.1
4.3
4.5
2016–17
1.0
1.6
2.1
2.5
2.9
3.2
3.6
4.1
4.7
2017–18
–1.0
0.0
0.7
1.3
1.9
2.5
3.2
4.0
5.2
2018–19
–2.0
–1.1
–0.3
0.3
1.0
1.7
2.5
3.5
4.8
2019–20
–3.5
–2.6
–1.9
–1.2
–0.5
0.3
1.1
2.2
3.6
2020–21
–3.6
–2.7
–1.9
–1.2
–0.5
0.3
1.2
2.3
4.0
Source: Economic and Fiscal Outlook, March 2016 (OBR)
Fiscal Policy
•
The purpose of fiscal policy
– correcting a fundamental disequilibrium
– smoothing out fluctuations (‘fine tuning’)
– to affect the capacity of the economy
•
Government finances
– central government deficits and surpluses
– public-sector deficits and surpluses
• financing a deficit
• public-sector net borrowing (PSNB)
• general government debt
Fiscal Policy
•
•
The stance of fiscal policy
– the business cycle and public finances
– attempts to cut public-sector deficits
The use of fiscal policy
– automatic fiscal stabilisers
• tax stabilisers
• benefits stabilisers
– discretionary fiscal policy
• the government expenditure multiplier
• the tax multiplier
• effects on different businesses
Fiscal Policy
•
Effectiveness of discretionary fiscal policy
– predicting the effect of changes in government
expenditure
• the problem of crowding out
– predicting the resulting multiplier effect
– the problem of random shocks
– problems of timing and time lags
– the problem of imperfect information
• a destabilising effect
Fiscal policy: stabilising or destabilising?
Real national income
Path (a): no intervention
3
4
3
2
4
2
1
1
O
Time
Fiscal policy: stabilising or destabilising?
Real national income
Path (a): no intervention
Path (b): policy stabilises
3
4
3
2
4
2
1
1
O
Time
Fiscal policy: stabilising or destabilising?
Real national income
Path (a): no intervention
Path (b): policy stabilises
Path (c): policy destabilises
3
4
3
2
4
2
1
1
O
Time
Fiscal Policy
•
•
UK fiscal rules
– the Labour government’s approach pre-2008
• the Golden Rule and Sustainable Investment Rule
– abandoning these rules in response to the financial crisis
– the Coalition and Conservative governments’
approaches
• a cyclically adjusted current balance
• the Fiscal Mandate
– loosened in 2015
Cut the deficit now or later?
Cyclically adjusted public-sector net borrowing fan chart
Source: Economic and Fiscal Outlook, March 2019, Chart 5.4 (Office for Budget Responsibility)
Fiscal Policy
• The Fiscal framework in the EU
– the Stability and Growth Pact
General government deficits in the eurozone
12
Eurozone
France
Germany
General government deficits (% of GDP)
11
10
9
8
7
6
5
Limit under Stability
and Growth Pact
4
3
2
1
0
−1
−2
Start of euro
−3
1992
1997
2002
2007
Note: data from 2017 based on forecasts.
Source: Based on data in Statistical Annex to the European Economy (European Commission).
2012
2017
Fiscal Policy
• The Fiscal framework in the EU
– the Stability and Growth Pact
– the Fiscal Compact
• the structural deficit
• debt to GDP ratios
• the European Stability Mechanism
– scope of the ESM
– use of the ESM
– assessment
.
Thank You
TEXTBOOK:
Essential Economic for Business
6th Edition
JOHN SLOMAN
ELIZABETH JONES