Middle East and North Africa
How Israel and Turkey Benefit From Restoring Relations The reopening of diplomatic ties with Israel is the latest move in Turkey’s regional rapprochement. With it, Ankara aims to bolster national security and its wavering economy.
Fiscal policy refers to the actions taken by governments to help direct their economies. This is done through a variety of measures, including taxation. There isn't just one central body responsible for fiscal policy. In fact, both the President and the U.S. Congress have a hand in it, which means it is directed by both the executive and legislative branches of the U.S:
The so-called Taxing and Spending Clause of the U.S. Constitution, Article I, Section 8, Clause 1, authorizes Congress to levy taxes. However, the Constitution really only specifies two legitimate purposes for taxation: To pay the debts of the federal government and to provide for the common defense. Even though an argument could be made that the clause's provisions exclude the use of taxes for fiscal policy purposes, such as a tax-cut bill to expand the economy, basic macroeconomics suggests that any level of taxation has an impact on aggregate demand.
Fiscal policy is an economic strategy that uses a government's taxing and spending powers to impact a nation's economy. Contemporary fiscal policy is largely founded on the economic theories of John Maynard Keynes who rose to prominence during the 1930s. He developed many of his ideas in response to the Great Depression and proposed that governments could stabilize the business cycle and regulate economic output by adjusting spending and tax policies. Per Keynesian economic theory, both government spending and tax cuts should boost:
It is commonly used in conjunction with monetary policy to help keep the economy in check. Monetary policy is set by a central bank and focuses on interest rates and the money supply to either slow down or propel economic growth. As noted above, the legislative and executive branches play a major role in shaping fiscal policy. But the judicial branch—the Supreme Court and even lesser courts—can also impact fiscal policy by legitimizing, amending, or declaring unconstitutional certain measures taken by the executive or legislative branches to affect the national economy. The power to spend to encourage certain outcomes has been generally interpreted as constitutional ever since the South Dakota v. Dole ruling by the U.S. Supreme Court in 1987. In this case, the court upheld the constitutionality of a federal statute that withheld federal highway funds from states whose legal drinking age did not conform to federal policy (a minimum drinking age of 21). The type of fiscal policies enacted by the executive and legislative branches depends on the course of the economy. They may take a contractionary or expansionary approach based on what outcome they wish to achieve.
Inflation can create major problems for the economy, which is why governments and economists closely monitor it. They each use fiscal and monetary policies to fuel growth or to stop the economy from overheating. As we already mentioned in the previous section, expansionary fiscal policy in the U.S. has been pursued through a combination of spending public funds on politically attractive ends, such as infrastructure, job training, or anti-poverty programs. It also involves lowering taxes on all or some taxpayers. Fiscal policies in the U.S. are normally tied into each year's federal budget, which is proposed by the president and approved by Congress. This budget highlights details of what is to be expected in the upcoming fiscal year, which begins on October 1. Here are the main priorities of the budget:
But there have been times when no budget has been proposed, which makes it more difficult for market participants to react and adjust to coming fiscal policy proposals.
Once the budget is approved, Congress then develops budget resolutions. These are used to set parameters for spending and tax policy. After resolutions are made, Congress begins the process of appropriating funds from the budget toward specific targets. These appropriations bills must be signed by the President before they can be enacted.
The president has a major role in the country's fiscal policy. As part of the executive branch, the president lays out plans during the annual budget proposal. This proposal indicates the amount of tax revenue the government intends to collect and how much government spending is anticipated per portfolio, such as education, defense, and health.
Congress has a big role to play in fiscal policy. It is one of the bodies that help shape the country's spending and tax policies along with the executive branch. This branch of the government is responsible for developing budget resolutions once the president's annual budget is approved.
Expansionary fiscal policy involves an increase in government spending and a drop in the collection of taxes, perhaps through lowered tax rates. Governments use expansionary fiscal policies in order when they want to fuel growth after a recession. Prices rise and unemployment drops. During this period, people have more money in their pockets and can spend more freely.
Authorities have a few tools at their disposal when it comes to helping control the direction of the economy. Monetary policy is enacted by central banks like the U.S. Federal Reserve while fiscal policy is the responsibility of the government—namely the executive and legislative branches. It commonly involves the use of government spending and taxation. The president submits an annual budget, which Congress uses to develop budget resolutions. |
Generally, when is a president more likely to get congressional approval of proposed policies?
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