Fiscal+Policy,+Deficit,+and+Surplus

__** Fiscal policy, Deficit and Surplus **__ Fiscal policy: Government spending and taxation

In class we talked about how to find if the government is facing a surplus or a deficit. You need to look at the relationship between government spending (G) and the governmnets net tax revenue (T). To get net tax revenue you use this formula: taxes – transfer payments. This is the amount of money that is coming in the government and is a leakage in the circular flow of money. The government gets tax revenue from sales taxes, property taxes, and more. Government spending is what the government spends on things like in roads. Government spending is classified as an injection in the circular flow of money. If the governments net tax revenue and spending equal this is called a balanced budget. Therefore, the three formulas below will help you determine if the government is facing a surplus or a deficit.

· Government spending > taxation (Budget Deficit) · Government spending < taxation ( Budget Surplus) · Government spending= taxation (balanced budget) Why government spending is a horizontal line, why taxes are upward sloping…

· Taxes are an induced spending (it depends on income) · Government spending is autonomous (doesn’t depend on income)

If you would like to find national debt/public debt you can take the sum of government’s budget deficits and subtract the sum of its surpluses. This is when the government will issue long-term bonds to finance their debt.

The business cycle can affect how much net tax revenue the government receives. During a period in the business cycle where there is high unemployment, there will be less net tax revenue because no one is able to work. If no one is able to work they are not able to buy as much so the consumption spending goes down. The majority of taxes come from consumption spending. Therefore, during the con period of the business cycle the government will might incur a budget deficit.

If you were to use the Keynesian view of unemplyment, which is to stimulate the economy with government during this time, sometimes the government can be in just a big budget deficit it will be hard to get out of. The deficit can be getting bigger and bigger, and that is the problem that the United States is going through right now. This is just like we talked about in class, how the United States is going through this problem. They had to keep raising their debt ceiling because their deficit keeps getting larger and larger. Last Friday the United States had to choose what to do to bring their deficit down. We all know from class that none of the solution that there is for them to choose from are very pretty. The United States debt ceiling is 14.3 trillion and they are soon going to hit that debt ceiling and need to figure out a plan.

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