Question

Explain the difference between discretionary versus nondiscretionary fiscal policy.

Answer 1

Discretionary fiscal policy:-

Discretionary fiscal policy refers to government policy that alters government spending or taxes. Its purpose is to expand or shrink the economy as needed. For instance, when the UK government cut the VAT in 2009, this was intended to produce a boost in spending.The output is determined by the level of aggregate demand (AD), so a discretionary fiscal policy can be used to increase aggregate demand and thus also increase the output. This measure would help to close the deflationary gap. Discretionary fiscal policy is a demand-side policy that uses government spending and taxation policy to influence aggregate demand. Discretionary fiscal policy differs from automatic fiscal stabilizers. These automatic stabilizers take place when, during a recession, a government automatically spends more because the economy forces more people to claim unemployment benefits. However, the government may find these automatic stabilizers to be inadequate to deal with major issues, imbalances, and instabilities in the economy. This will lead them to intentionally increase public works spending schemes as well.Discretionary fiscal policy is a change in government spending or taxes. Its purpose is to expand or shrink the economy as needed. Discretionary fiscal policy is a change in government spending or taxes. Its purpose is to expand or shrink the economy as needed. Discretionary fiscal policy uses two tools. They are the budget process and the tax code. The first tool is the discretionary portion of the U.S. budget. Congress determines this type of spending with appropriations bills each year. The largest is the military budget. All other federal departments are part of discretionary spending too. The budget also contains mandatory spending. This includes payments from Social Security, Medicare, Medicaid, Obamacare and interest payments on the national debt. Congress mandates these programs. They are the law of the land. Congress must vote to amend or revoke the relevant law to change these programs. Therefore, changes in the mandatory budget are very difficult. For that reason, it isn't a tool of discretionary fiscal policy. The second tool is the tax code. It includes taxes on workers' incomes, corporate profits, imports and other excise fees. Only Congress has the power to change the tax code. Congress’ changes to the tax code has to be done by enacting new laws. These laws must be passed by both the Senate and the House of Representatives. But the president has the power to change how tax laws are implemented. He can send directives to the Internal Revenue Service to adjust the enforcement of rules and regulations.

Nondiscretionary fiscal policy:-

Nondiscretionary fiscal policy refers to various ongoing programs of government spending and taxation. These are primarily for income maintenance purpose. They are usually rarely changed. They include social security, welfare and unemployment compensation. Fiscal policy is the tax and spending activity of the federal government .of the almost 4Trillion dollar annual budget less than 1 Trillion is discretionary spending which changes every year and requires annual authorizations by congress.The non-discretionary budget is based on existing laws such as Medicare ,Medicaid and social security payments which must be paid to eligible beneficiaries who are entitled to the services or benefits.These programs cannot be reduced unless the underlying eligility laws or regulations are modified.Both the discretionary and non discretionary spending are the spending side of the federal budget .The revenue side of the federal budget or fiscal policy is determined by Tax policies ,primarily income ,excise,and tariffs . The spending budget reflects the various policies,programs and priority of the federal government .The revenues or taxes raised to fund these programs are used to pay for the cost of these programs .When the revenues and expenditures are the same you have a balanced budget.When revenues are higher ,you get a budget surplus and when they are lower you get a budget deficit.The government has been running large deficits every year for over 20 years.The fiscal policy is considered stimulative when you have a deficit which can occur due to lower revenues or tax cuts or higher spending.During a recession,you can increase the discretionary budget or cut taxes to stimulate the economy.

  Difference between Discretionary and Nondiscretionary Fiscal Policy. Fiscal policy refers to the governmental actions through which it can maintain revenue and control expenditure. It can be of two types, discretionary and nondiscretionary fiscal policy . Discretionary fiscal policy is the government action that indicates towards planned action to balance the economy whereas nondiscretionary fiscal policies are happening automatically. Both types of fiscal policies are differing with each other. The Nondiscretionary fiscal policy includes the laws that automatically speedup or slow down the economic growth . On the other hand, discretionary fiscal policy includes new laws that are designed to balance the economy. On the slope down condition of the economy the nondiscretionary laws give a rise in governmental spending or decrease the taxes. On the other hand, if the economy grows too fast then the laws helps to avoid inflation with decrements in governmental spending or an increase in taxes. In discretionary fiscal policy the decision to made changes in tax rates is appeared when the economy faces hard time like a recession or economic turbulence. The handling of several challenging situations is concerned under a discretionary fiscal policy. So, it used for making quick changes whereas nondiscretionary is one that is implemented in the long run . Nondiscretionary includes the laws that are generally but discretionary includes laws that are made in sudden situation.