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FISCAL POLICY
DISCOVERING CONNECTIONS
In the early 1980s, under President Ronald Reagan, the federal government reduced personal income tax rates by 25 percent. The goal was to expand aggregate demand and boost national output and employment in order to end the recession of 1980-1981. During the 1996 presidential campaign, one of President Bill Clinton’s programs was supposed to stimulate economic growth by boosting government spending on long-term investment. This investment program included highways, bridges, fibre-optic communications networks, and education.
Think and answer the questions below.
· Examples of what are both Reagan’s tax cut and Clinton’s investment spending programs?
· Does an increase in government spending or a tax cut of equal amount provide the greater stimulus to economic growth?
· Can Congress fight a recession without taking any action?
· Why did Ronald Reagan think the federal government could increase tax revenues by cutting taxes?
READING
Text 1
As you read the text pay attention to the words denoting an increase and a decline.
Fiscal Policy
Policy aimed at changing the level of either government spending or taxes to stimulate or slow down the economy is known as fiscal policy. It was invented by the British economist John Maynard Keynes in the 1930s. Keynes believed that increased demand for goods and services should be met by expanded production. However, after a nation’s economy reaches full capacity, production cannot expand. If the demand for goods and services increases, prices continue to rise and inflation occurs. In such cases, Keynes recommended a tax increase, which would reduce the demand for goods and services and relieve the pressure on prices.
Keynes maintained that governments should use fiscal policy (tax and spending programs) to stabilize the economy. He said the overall level of economic activity depends on effective demand – that is, total spending by individuals, businesses, and government.
To understand how fiscal policy works, we need to understand three basic concepts. First, the deficit. When government spending is greater than tax revenue, we have a federal budget deficit. The government is paying out more than it is taking in. How does it make up the difference? It borrows. Deficits have been much more common than surpluses. This is not to say that deficits are always bad. Indeed, during recessions, they are just what the economic doctor ordered.
Second, budget surpluses are the exact opposite of deficits. They are prescribed to fight inflation. When the budget is in a surplus position, tax revenue is greater than government spending.
Finally, we have a balanced budget when government expenditures are equal to tax revenue.
Thus, fiscal policy is the manipulation of the government budget deficit or surplus to influence the level of aggregate income (or GDP) in the economy. If aggregate income is too low (actual income is below target income), the appropriate fiscal policy is expansionary fiscal policy: to increase the deficit, or to reduce a surplus, which means the government spends more or takes in less. If aggregate income is too high (actual income is above target income), the appropriate fiscal policy is contractionary fiscal policy: to reduce the deficit, or to increase a surplus, which means the government takes in more in taxes or spends less.
Expansionary and contractionary fiscal policies are two basic types of discretionary fiscal policy, which is the deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the economy.
Exhibit 1 lists these types of fiscal policy and the corresponding ways in which the government can pursue each of these options.
Exhibit 1.
Discretionary fiscal policy
| Expansionary fiscal policy | Contractionary fiscal policy |
| Increase government spending | Decrease government spending |
| Decrease taxes | Increase taxes |
| Increase government spending and decrease taxes equally | Decrease government spending and increase taxes equally |
The fundamental purpose of fiscal policy is to eliminate unemployment or inflation. When recession exists, an expansionary fiscal policy is in order. This entails increased government spending or lower taxes, or a combination of the two. In other words, if the budget is balanced at the outset, fiscal policy should move in the direction of a government budget deficit during a recession or depression.
Conversely when demand-pull inflation stalks the land, a restrictive or contractionary fiscal policy is appropriate. A contractionary policy is composed of decreased government spending, or higher taxes, or a combination of these two policies. Fiscal policy should move toward a surplus in the government’s budget when the economy is faced with the problem of controlling inflation.
So ‘Keynesians’ believe that the government should be active in stabilizing the macroeconomy, as it will fail to adjust if it is left to its own devices. But fiscal policy takes time to come into effect and there is no guarantee that it will work in the desired direction. In other words, attempts to intervene using fiscal policy can be damaging because they operate with such long time lags that they may end up being the cause of tomorrow’s problems rather than helping with those of yesterday.
The 2008/09 global economic crisis has shaken the foundation of the free market consensus of the past two decades. The current responses of the governments across the globe on the global recession fully recognize the Keynesian view that markets do not have any automatic mechanism to self correct and that government intervention is necessary to revive the economy.
Vocabulary Focus
Ex. 1. Mind the use of the words policy and politics which have certain similarities in meaning, but are not exactly the same.
1. Policy has two meanings.
a) An agreed set of principles which form the basis of any decision:
Our policy is to keep costs as low as possible.
b) An insurance certificate.
You should always read the small print of your insurance policy.
2. Politics refers to
a) the activity of government and the political parties in opposition.
Politics has been defined as an art of possible.
b) activities concerned with gaining or using power within an organisation or group.
Office politics are aimed at improving organizational culture.
Her politics are nothing to do with me.
The adjective is political.
Complete the blanks:
The international manager must understand the effect of 1. ______ on business. A change in bilateral 2. ______ relations can change strategic
3. ______ and modify investment decisions. 4. ______ is a controversial topic. 5. ______ is more general than ______. 6. The government must evolve new ______ to reduce unemployment.
Ex. 2. Make the following words negative by using one of the following prefixes:
| de- | dis- | im- | in- | un- | non- | re- |
| 1) … discretionary | 7) … stabilize | 13) … appropriate |
| 2) … increase | 8) … effective | 14) … progressive |
| 3) … desirable | 9) … perfect | 15) … balanced |
| 4) … stable | 10) … predictable | 16) … deliberate |
| 5) … efficiency | 11) … voluntary | 17) … adjusted |
| 6) … natural | 12) … equal | 18) … governmental |
Ex. 3. Choose the words with opposite meaning from two columns and arrange them in pairs.
| A | B |
| 1) cut (v) | a) surplus (n) |
| 2) individual (a) | b) increase (v) |
| 3) nominal (a) | c) poverty (n) |
| 4) target income | d) public (a) |
| 5) save (v) | e) real (a) |
| 6) wealth (n) | f) collective (a) |
| 7) deficit (n) | g) actual income |
| 8) private (a) | h) laissez faire |
| 9) intervention (n) | i) spend (v) |
Ex. 4. Match the Russian word combinations with their English equivalents:
| 1) собирать налоги 2) совокупный спрос 3) устранять безработицу или инфляцию 4) стимулирующая фискальная политика 5) доход от налогов, налоговые поступления 6) потребительские расходы 7) платежеспособный спрос 8) сдерживающая фискальная политика 9) бюджетный дефицит 10) бюджетный профицит | a) aggregate demand b) to take in taxes c) consumer spendings d) to eliminate unemployment or inflation e) a contractionary/restrictive fiscal policy f) a budget deficit/shortage g) a budget surplus h) an expansionary fiscal policy i) an effective demand j) tax revenue |
Comprehension
Ex. 1. Complete the sentences.
1. Fiscal policy is….
2. Keynes maintained that governments should use fiscal policy to….
3. According to Keynes the overall level of economic activity depends on….
4. If aggregate income is too low….
5. If aggregate income is too high….
6. Expansionary and contrationary fiscal policies are two basic types of….
7. A contractionary policy is composed of….
8. An expansionary fiscal policy means….
9. Attempts to intervene using fiscal policy can be damaging because they….
Ex. 2. Answer the questions:
1. Who invented fiscal policy? What kind of policy is it?
2. How can the government influence the demand for goods and services?
3. What are the two basic types of discretionary fiscal policy? How do they differ?
4. What do economists blame Keynesian policies for?
Text 2
Look at the title of the text and say what problems might be discussed in the text.
Other Issues in Fiscal Policy
A second type of fiscal policy is built into the structure of government taxes and spending. This is referred to as “ non-discretionary fiscal policy ” or more commonly as “automatic stabilizers”or“built-in stabilizers ”.
When the economy contracts, tax receipts automatically decrease (because incomes decrease). The effect is magnified by progressive taxation, (when the system is applying higher tax rates to higher incomes). Workers who are laid off automatically fall into a lower tax bracket. Their lower taxes will partially offset the effect of their lost income. Similarly, when incomes rise, particularly during inflation, bracket creep* pushes people into higher tax brackets. The higher taxes they pay take money out of their pockets – money they can no longer use to bid prices up even higher.
Another aspect of non-discretionary fiscal policy is welfare system which is government financial aid provided to individuals in need. The payment of unemployment benefits is a typical example of non-discretionary fiscal policy. The payments necessarily increase when the number of unemployed increases, and that is during an economic slow down. The payments necessarily decrease when the unemployed return to work with an economic recovery. The progressive income tax (the major source of federal revenue) and the welfare system both act to increase aggregate demand in recessions, and to decrease aggregate demand in overheated expansions. Fiscal policy exerts an automatic stabilizing effect on the economy, even when the government makes no explicit changes in its tax or spending plans.
Another issue in fiscal policy is multiplier effect or spending multiplier. It is the idea that an initial amount of spending (usually by the government) leads to increased consumption spending and so results in an increase in national income greater than the initial amount of spending. The multiplier effect has been used as an argument for the efficacy of government spending or taxation relief to stimulate aggregate demand.
Finally, like the multiplier, the propensities to spend and to save are at work. If the government reduces taxes to stimulate consumption, but households save money rather than to spend it, consumption will not rise, nor will investment. If people save the money, they are “sitting on their wallets” and consumption remains low. If consumption is low, businesses won’t invest. This has been a problem in the application of fiscal stimulus in Japan, where people tend to save increases in income.
Note: *bracket creep – переход в группу населения с доходами, подлежащими обложению налогами по более высоким ставкам
Ex. 1. Match the following Russian word combinations with their English equivalents:
| A | B |
| 1) прогрессивное налогообложение | a) to exert |
| 2) ступень налоговой шкалы | b) a welfare system |
| 3) набавлять цену | c) progressive taxation |
| 4) система социального обеспечения | d) a multiplier effect |
| 5) приводить в действие | e) a propensity to spend |
| 6) умноженное воздействие на доход | f) a tax bracket |
| 7) эффективность, действенность | g) to bid prices up |
| 8) склонность к потреблению | h) an efficacy |
| 9) склонность к сбережению | i) a propensity to save |
Ex. 2. Based on your understanding of the text, are the following TRUE or FALSE?
1. Fiscal policy exerts an automatic stabilizing effect on the economy, even when the government makes no explicit changes in its tax or spending plans.
2. When the economy contracts, tax receipts automatically increase.
3. When the economy expands government spending for unemployment compensation, welfare, and other transfer payments increases.
4. Workers who are laid off automatically fall into a higher tax bracket.
5. The multiplier will boost the effect of an increase or reduction in taxes or spending.
6. If the government reduces taxes to stimulate consumption, but households save money rather than to spend it, consumption will not rise, nor will investment.
7. If people save the money, they are “sitting on their wallets” and consumption increases.
Ex. 3. Find information in the text to answer the following questions.
1. What are automatic stabilizers?
2. How does the multiplier effect work?
3. How can you account for the term ‘propensity to consume or to save’?
Text 3
While reading the text complete the gaps with the following words:
| boom | demand | employment | money supply | output |
| price | equilibrium | interest rates | recession | saving |
Should the Government Intervene in the Business Cycle?
Keynesianism
The great depression of the 1930s demonstrated that, at least in the short run, the market system does not automatically lead to full employment. In The General Theory of Employment, Interest and Money (1936), John Maynard Keynes argued that market forces could produce an equilibrium with high unemployment of indefinite duration. For example, if people are worried about the possibility of losing their jobs in the near future they will probably start (1) ……. money and consume less, which will lead to a fall in demand, and consequently in production and employment. In such circumstances, producers will clearly not be interested in making new investments. So people’s savings will remain unused, and the economy will settle into a new (2) …… at a lower level of activity – with fewer goods being produced, fewer people employed, and reduced rates of income and investment. Classical economic theory stated that in the long run, excess savings would cause (3) …… to fall and investment to increase again. Keynes disagreed, arguing that market economies areinherently unstable and without a self-correcting mechanism, except perhaps in the long run – but as he famously put it, ‘in the long run, we are all dead.’ Keynes therefore recommended governmental intervention in the economy, to counter the business cycle. During an inflationary (4) ……, governments could decrease their spending or increase taxation. During a recession, on the contrary, they could increase their expenditure, or decrease taxation, or increase the (5) …… and reduce interest rates, so as to stimulate the economy and increase output, investment, consumption and employment. Keynes also argued that even a small amount of additional government spending or an increase in private investment causes (6) …… to expand by an amount greater than itself, because of the multiplier effect.
Monetarism
In the 1950s and 1960s, monetarists, most notably Milton Friedman, began to argue that Keynesian fiscal policy had negative long-run effects. Unlike Keynesians, monetarists insisted that money is neutral, meaning that in the long run, changes in the money supply will only change the (7) …… level and have no effect on output and employment. They argued that governments should abandon any attempt to manage the level of (8) …… in the economy through fiscal policy. On the contrary, they should try to make sure that there is constant and non-inflationary growth in the money supply.
Monetarists argue that recessions are not caused by long-run market failures but by short-run errors by firms and workers who do not reduce their prices and wages quickly enough when demand falls. When economic agents recognize that prices and wages have to fall, the economy will come back to normal. Since the government will not be able to recognize a coming (9) …… any more quickly than the companies that make up the economy, it will only be able to act at the same time as everyone else is recognizing the need to cut prices and wages. Consequently, its fiscal measures will take effect when the economy is already recovering, and so will merely make the next swing in the business cycle even greater.
Neo-Keynesianism
Whereas classical (and neo-classical) economic theory assumes prices and wages to be flexible enough to eliminate excess supply or demand, Keynesians (today often called neo-Keynesians) argue that wages are inflexible or ‘sticky’ because of labour union contracts, government regulation, and so on. Furthermore, businesses cannot change their prices too frequently, because they do not have perfect information, and because there are many costs involved. These are sometimes known as ‘menu costs’, drawing on the example of restaurateurs who cannot afford to print menus with new prices every dayaccording to small fluctuations in demand.
Neo-Keynesians still maintain that because individuals and firms are unable to find the right prices that would lead the economy to rising output and high or full (10) ……, economies can get locked into disequilibriums for long periods. Thus unlike the monetarists, who insist that free markets and competition are efficient and should be allowed to operate with a minimum of governmental intervention, Keynesians believe there is still a role for either expansionary or deflationary government policies.
Ex. 1. Match up the words from A and B into pairs that mean the same.
| A | B |
| 1) boost (v) | a) expenses (n) |
| 2) company (n) | b) production (n) |
| 3) costs (n) | c) reduce (v) |
| 4) error (n) | d) firm (n) |
| 5) excess (n) | e) variable (a) |
| 6) flexible (a) | f) raise (v) |
| 7) output (n) | g) stimulate (v) |
| 8) increase (v) | h) mistake (n) |
| 9) lower (v) | i) surplus (n) |
Ex. 2. Answer the questions:
1. According to Keynes, what might provoke a high-unemployment equilibrium?
2. According to classical theory, what will happen if people save a lot of money?
3. Keynesian policy is often described as ‘demand management’. What does this mean?
4. According to Keynes, what is the economic effect of even a small increase in government spending?
5. What do monetarists mean by ‘the neutrality of money’?
6. According to classical theory, what will bring about the end of a recession?
7. What is the monetarist or neo-classical objection to government intervention?
8. According to neo-Keynesians, why do prices and wages not adapt as classical theory says they will?
WRITING
Write an essay to express your opinion on government intervention to rescue the financial and real sectors of the economy in the period of world economic crisis. What are the economic arguments against such governmental spending? What arguments for this kind of spending can you give? Express also your views on regulating taxes in the period of contracting industrial output.
You can use the list of discourse connectors that follows:
| Expressions for giving opinions |
|
| To introduce points/arguments for or against | One very convincing point/argument in favour of / against is...,
| |||||
| To make contrasting points |
|
TRANSLATION
A. Translate into Russian with a dictionary.
Many nations of the world have enacted fiscal stimulus plans in response to the global, on going recession. These nations have used different combinations of government spending and tax cuts to boost their sagging economies. Most of these plans are based on the Keynesian theory that deficit spending by governments can replace some of the demand lost during a recession and prevent the waste of economic resources idled by a lack of demand. The International Monetary Fund has recommended that countries implement fiscal stimulus measures equal to 2% of their GDP to help offset the global contraction.
The United Kingdom has been one of the major economies leading calls for fiscal action to stimulate aggregate demand. Throughout 2008 a number of fiscal measures were introduced including a tax cut for basic tax payers, a temporary 2.5% cut in Value Added Tax (Sales Tax), £3 billion worth of investment spending brought forward from 2010 and a variety of other measures.
Despite entering the crisis with a low level of public debt (roughly 40% of GDP) and a moderate deficit compared to many European nations, the UK has been limited in its ability to take discretionary fiscal action by the significant burden that bank bail-outs have had on public finances.
B. Translate into English.
Фискальная политика представляет собой меры, которые предпринимает правительство с целью стабилизации экономики с помощью изменения величины доходов и/или расходов государственного бюджета. Целями фискальной политики как любой стабилизационной (антициклической) политики, направленной на сглаживание циклических колебаний экономики, являются обеспечение: 1) стабильного экономического роста; 2) полной занятости ресурсов (прежде всего решение проблемы циклической безработицы); 3) стабильного уровня цен (решение проблемы инфляции).
Фискальная политика – это политика регулирования правительством прежде всего совокупного спроса. Регулирование экономики в этом случае происходит с помощью воздействия на величину совокупных расходов. Фискальную политику проводит правительство. Инструментами фискальной политики выступают расходы и доходы государственного бюджета, а именно: 1) государственные закупки; 2) налоги; 3) трансферты.
LISTENING
Ex. 1. Before listening to the interview with Kate Barker talking about Keynesianism and monetarism, make sure that you understand the following word combinations:
| to boost domestic demand a multiplier effect to lift economy out of recession information flows | to dispose of smth. to make a business cycle flatter an interventionist policy to accentuate cycles |
Ex. 2. Listen to the interview and decide whether the following statements are true or false (T or F).Give the reasoning.
1. Keynesians believe that if the government borrows and spends more money, economic activity will increase.
2. Keynesians want to boost domestic demand, meaning spending by households rather than businesses.
3. If the government borrows more money, this affects interest rates and business investment.
4. Monetarists say that the only result of increasing the money supply is to raise prices.
5. Keynesians believe that a government can increase the money supply without people noticing it, so that they spend more, and business invest more.
6. The goal of Keynesianism is to eliminate recessions.
7. Monetarists see neither economic advantages nor disadvantages in increasing the amount of money in circulation.
SPEAKING
A. Useful Language: Describing trends.
We can describe trend in English in different ways. For example:
Verbs of change
Profits soared 18.5%.
Profits are falling.
Sales plummeted in January.
Prepositions
Profits rose 11% to $2.7 billion.
Profits have done up from 3 million to 4 million euros.
Our business grew by 10% last year.
There’s been a decrease in annual sales of 1 million euros.
Last years profits stood at 2.5 million pounds.
Different verb forms
The figures show a positive trend. (Present Simple)
We’ re watching the trends carefully. (Present Continuous)
Last year we made a loss. (Past Simple)
In recent months our profits have risen dramatically. (Present Perfect)
If sales drop further, we’ ll be in serious financial difficulty. (First Conditional)
Ex. 1. What kind of movement do the verbs below describe? Match them to the symbols. Then compare your answers with a partner. (Use some symbols more than once)
| decline | gain | drop | increase | rocket | plummet |
| double | fall | halve | level off | triple | recover |
| decrease | fluctuate | improve | peak | rise | zoom |
Which of the above verbs also have noun forms? What are they?
For example: to increase – an increase.
Ex. 2. Complete these sentences with appropriate prepositions.
1. Sales have increased... €5m … €7m.
2. Sales have increased … €2m.
3. There has been an increase … €2m in our sales.
4. Sales now stand … €7 million.
5. Sales reached a peak … €7 million in July.
6. Sales reached a low point … €1 million in April.
B. Discuss the following issues:
1. What is the difference between fiscal and monetary policies?
2. How will you comment on Adam Smith’s words that “the only good budget is a balanced budget”?
3. What are the tools of fiscal policy?
4. Who carries out fiscal policy?
5. What are the effects of expansionary fiscal policy in the economy?
6. Can fiscal policy produce inflation?
7. What recent examples of fiscal policy in the world do you know?
8. Did they bring positive results for the economy?
VOCABULARY
benefit n – льгота, привилегия
unemployment ~ – пособие по безработице
budget n – бюджет, смета
balanced ~ – сбалансированный бюджет (бюджет, в котором существует равновесие между доходами и расходами)
~ deficit/shortage – бюджетный дефицит
~ surplus – бюджетный профицит (превышение доходов бюджета над расходами)
effective demand – платежеспособный спрос
eliminate v – устранять, исключать, уничтожать, ликвидировать
fiscal policy –налогово-бюджетная/фискальная политика
contractionary ~or tight/restrictive~– сдерживающая/жесткая фискальная политика
discretionary ~ – дискреционная фискальная политика
expansionary ~ or easy/free/loose ~ – стимулирующая/свободная фискальная политика
non-discretionary ~ – недискреционная фискальная политика
multiplier n – мультипликатор (означает численный коэффициент, показывающий, во сколько раз возрастает доход при данном расчете инвестиций)
~ effect – умноженное воздействие на доход
spending ~ – мультипликатор расходов
propensity n – склонность
~ to consume – склонность к потреблению
~ to save – склонность к сбережению
soar v – стремительно повышаться
tax n – налог
~ bracket – ступень налоговой шкалы
~ rate – ставка налога
~ revenue – доход от налогов, налоговые поступления
~ receipts – денежные поступления от налогов
income ~ – подоходный налог
progressive income ~ – прогрессивный подоходный налог
taxation n – обложение налогами, налогообложение
~ relief – налоговое послабление
velocity n – скорость обращения денег
welfare n – благосостояние, благополучие, достаток
~ system – система социального обеспечения
GLOSSARY
· Automatic stabilizers are federal expenditures and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction; sometimes referred to as non-discretionary fiscal policy.
· Balanced budget is a budget when revenues and expenditures are equal during a given period.
· Budget deficit is a budget in which government expenditures exceed government revenues in a given time period.
· Budget surplus is a budget in which government revenues exceed government expenditures in a given time period.
· Discretionary fiscal policy is the deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the economy.
· Fiscal policy is the use of government spending and taxes to influence the nation’s output, employment, and price level.
· Government debt (sometimes called public debt) consists of the total or accumulated borrowings by the government; it is the total dollar value of government bonds owned by the public (households, banks, businesses, foreigners, and other non-federal entities).
· Monetarism is the simpler view that changes in monetary policy directly change aggregate demand and thereby prices, real GDP, and employment. Thus, monetarists focus on the money supply, rather than on the rate of interest.
· Non-discretionary fiscal policy refers to the appropriate changes in the levels of government expenditures and taxes that occur automatically. This is called built-in stabilizers or automatic stabilizers.
· Tax multiplier is the change in aggregate demand (total spending) resulting from an initial change in taxes.
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