Question

What are some of the problems or challenges of fiscal policy application?

Answer 1

If the government depends on unreliable data, instead, in the first place, it will definitely take wrong policy decisions.
Implementation of a policy decision and/or the effect of a policy decision may lag behind. For example, when politicians understand the issue and agree to do something, it could be too late already (recognition lag and action lag). When a policy is enforced by the government, there could be a time lag before the policy affects the economy (impact lag)

An expansionary fiscal policy may eventually decrease aggregate demand due to crowding-out effect. Increased government borrowing leads to higher interest rates, leading to a decline in aggregate demand.
Instead of resource shortages the economy can be sluggish rather than lower demand. Fiscal policy does not help in this case (in fact it will raise inflation).
Since expansionary fiscal policy raises fiscal deficit, there is limit on how much government deficit it can withstand.

While fiscal policy solves one problem, it can worsen another.

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