Fiscal policy: If the concern is increasing GDP, why wouldn't a government want to pursue the...

Fiscal policy: If the concern is increasing GDP, why wouldn't a government want to pursue the policy of just increasing spending indefinitely to avoid ever having decreases in GDP?

Consider the effect on interest rates and investment, also consider the worthiness of pursing increased GDP as a singular goal.

Expert Solution

Fiscal policy refers to the Government's spending and taxation policies intended to maintain economic stability and achieve economic growth.

Its true that government sending(G) is a component of gross domestic product(GDP=C+I+G+X-M).However just increasing government spending indefinitely to avoid any decrease in GDP won't be good decision.In fact,such a decision will have long lasting negative impacts on the economy which are as follows

* Government will have to increase its revenue if it wants want to spend indefinitely.

*The main source of public revenue is taxation. The decision to rise taxrates will face both political and economic obstacles.

*Taxes will adversely affect consumption and investment

*Both micro economic and macro economic perspective suggests that taxes slow down economic growth.Therefore scope revenue will be limited

*Financing of fiscal deficit will involve rising interest rate and decline in private investment in the economy.

*Another impact of increasing government expenditure is widening fiscal deficit and rising debt burden

Even the some Keynesian economists favor the use of expansionary monetary policy compared to expansionary fiscal policy due the above mentioned consequences of increasing public expenditure.

Moreover pursuing GDP growth as single goal also had its own defects

*increasing GDP only means that there is economic growth.

*The distribution of the benefits of this growth is ignored

It's often the top 1-10 percent who will be enjoying the benefits of growth.

What we need is growth with structural changes and Peace and security ,in short sustainable development.

Rahul Sunny answered 6 months ago

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