Question

1. Fiscal Policy

What is fiscal policy? Is the President and Congress currently running expansionary fiscal policy or contractionary fiscal policy? Why? Visit the Congressional Budget Office and report a project that could impact the budget (search topics then pick an area that you find interesting and may even talk about the COVID-19 as well).

Answer 1

• A fiscal policy is a tool of the Federal Government to balance the economy by altering the taxes and spending.
• It is connected with a situation of inflation where the government needs to boost the aggregate demand.
• It is done through cutting or raising taxes and increased or decreased expenditure on certain projects.
• The roles of the Federal Government to keep an eye on the interest rates and money supply in the economy is achieved through Monetary Policy. Fiscal policy is also announced along with this.
• The other purposes of a fiscal policy is to address the issues of unemployment, to boost economic growth and to keep the prices and wages stable in the economy.
• There are mainly two types of fiscal policy, namely,. Expansionary Fiscal Policy and Contractionary Fiscal Policy.
• Expansionary Fiscal Policy is when the economy is in wake of a recession and there is a need to increase the money in the hands of people. It is done by cutting taxes and increasing government expenditure on projects in a way beneficial to the common public. It aims to increase consumption demand.
• Contractionary Fiscal Policy is done when inflation goes out of hand as the demand and the supply gets increased rapidly. It is done through increasing taxes and reducing public expenditure. It limits the amount of money in the hands of the public. It comes when the growth of the economy is unsustainable and unemployment levels are much less.

Now, the Federal Government is following an Expansionary Fiscal Policy as the growth rate in the country is slowing down along with the very much possible recession on cards. Even before the outbreak of COVID-19 virus which had hit the country pretty hard, for sometime, the United States have been following an Expansionary Fiscal Policy. The unemployment rates of the country are on a record high as well as the decrease in consumer spending is hurting the investment sentiments. In order to boost the economy which got affected last year after the US- China trade war, the United States and president assured to increase Public demand. The government is also focussing on increasing public expenditure to benefit it's citizens.

Recently, the United States government announced a $2 trillion package called Coronavirus Aid, Relief and Economic Security Act (CARES Act) in order to provide financial assistance to households, financial markets and businesses. Since it's the utmost emergency to aid the economy devastated by the pandemic COVID-19, the government should keep an eye on the economic situation of the country. With more than 20,000 fatalities and over 3 lakh infections and unemployment rates sky rocketing with millions have filed for unemployment benefits till date is taking a toll on the US economy as the nation seems to have got nowhere fighting the virus.

This economic package will add more than $1.8 trillion to the budget deficit over the next decade. The government spending is expected to rise by $1.31 trillion while the revenues are to fall by $446 billion.

The main highlight of the economic package is a Paycheck Protection Program which is basically a job protection program for workers in small business firms till June by government support of $350 billion. As the unemployment rates are getting high, the insurance to them is to add a $268 billion expenditure. A $1200 immediate aid will be given out to the taxpayers in the country. One thing that needs to be noted is that government is only deferring payment of taxes to a proposed time resulting in a moratorium like feature and it has to be repaid later.

Even before the COVID-19, the federal fiscal deficit was growing subject to the trade war between China and subsequent retaliations. With the introduction of CARES Act, that deficit is expected to rise further and will impact the budgetary allocations of the Federal Government. The limiting power of deficit is subject to the early recovery of USA from COVID-19 effects and after effects.