Question

What are the challenges inherent in ensuring that Fiscal policy is effective? 
Must be 250 words and non plagarized

Answer 1

What are the challenges inherent in ensuring that Fiscal policy is effective?

Fiscal policy is a tool used by government either by changing government spending or the levels of taxation. Government has to opt for fiscal policy as it helps in preventing economic crisis. Due to recession and financial crisis, most of the economists embraced government spending which is a tool of fiscal policy for economic growth and bring stability in the economy. The argument exists on which tool to use for economy’s betterment. Most of the economists squabble about government spending being better tool than tax cut during recession times.

Fiscal policy can be used in two ways either inflationary fiscal policy or deflationary fiscal policy. There are multiple challenges faced by government in ensuring fiscal policy which are described as below:

1. Government increases taxes in order to reduce aggregate demand which creates disincentives to labour. Due to which productivity and aggregate supply can fall drastically.
2. To design and implement a fiscal policy, government may take a longer time which can be late for the economy.
3. Budget deficits get increased by implementing expansionary fiscal policy which in turn lead to increase in taxes and future and generate crowding out.
4. If government plan to reduce government spending in order to reduce inflationary pressure on the economy, could result in spending less on public needs such as public transport, health and education which creates inefficiency in the market.
5. Fiscal policy implementation depends on the forecasting about the growth and situation of the economy. If by any chance the forecast grows wrong about it economy will have to suffer.