Fiscal regulation is a broad phrase that clearly describes the government enacted policies, expenditures and revenues and their impact on the economy. Governments can raise their income by raising taxes or increasing their spending through spending some revenues on programs. Expansionary fiscal policies are typically implemented in recession times as an attempt to build the economic demands and enhance the output of the economy which in most cases is reduced when there is a downturn (Karras, 2016). In addition, economists argue that budget deficits play a significant role in the economy in that it is a government strategy to fight the recession. In the case of an economic contraction, demand for goods and services fall and this result to decrease in gross domestic product (GDP). Moreover, it is standard for rates of unemployment to increase when a recession occurs and a reduction in income tax revenues for the government. Therefore, to ensure that the government budget is balanced, government expenditures must be cut to lower the tax receipts. As a result, the effect is a reduction in demand and erosion of the GDP thus making the economy to remain in a downfall route. The acts of raising the expenses of the government or reducing the taxes results to expansionary fiscal policies. An important point to note is that revenues for the government are based on the amount of taxes collected and thus when the governments taxes exceeds the expenditures, then the government is referred to has a surplus (Karras, 2016). On the other hand when the taxes collected are equal to expenses, the government is regarded to have a balanced budget. But if the government costs exceed the taxes collected, this state is referred to as a deficit to the government. Therefore, raising the government expenditure, creating a deficit budget and financing the deficit through debt insurance are all referred to as policy actions in an expansionary fiscal policy incidences. Lack of corroboration among the financial economist about benefits of economic stimulus is a challenging situation facing the funding procedure of expansionary policy. This discord mostly concentrates on crowding out, referred to as borrowing by the government and it results in high rates of interests which might influence the stimulative effects of government expenditure (Kassaipour, Taghavi, & Ghadimi, 2012). In addition, when the government creates a deficit budget, revenues comes from the public through taxes or borrowing from foreigners. This is what results to the government issuing bonds and its leads high-interest rates within the economy since the government borrowing is high and thus raises the demand for credits across the financial market. However, this results to reduced average demand for products and services thus defeating the objective of a fiscal stimulus. Fiscal stimulus is enacted with a perspective that tax relief gained through to lessen the rate of taxes of direct government expenditure through investing in programs such as construction, repair and infrastructure would provide stimulus for the purpose of increasing the economic growth by having a direct influence on government spending or consumption components of GDP (Kassaipour, Taghavi, & Ghadimi, 2012).
Zero inflation target
Today in the UK, the CPI inflation has dropped to zero, and the question remains on whether this is a concern or a celebration. Initially, the government had some good reasons setting an inflation target of 2%. However, the fear remains because the inflation is too low and it might result in problems that are associated to deflation (Owyang & Zubairy, 2015). When the inflation is set to be too low, it becomes much hard for people to repay their debts since they are required to spend high income for debt repayment and are left with little revenues to spend on other needs. In addition, when the rate of inflation drops to very low levels, the resultant is increasing real interests. High real interest rates lead the borrowing, and investing rate become less attractive, and the consumer is left with only one option- to save. Temporally short-term factors like the dropping of oil and petrol prices are the reasons for the fall of inflation in the UK. However, these factors cannot remain in this status for long since there are possibilities of them reversing. Fall of prices of commodities could result in income boost, and consumers discretionary revenue or spending power would increase and lead to high spending rate in the short run (Owyang & Zubairy, 2015). The inflation fall took place during a partial economic recovery. Despite the decline in inflation, the UK economy has not yet slipped into a recession but instead has slipped against the recession. In the past decades, there have been incidences of falling real wages resulting to higher inflation than the standard wage growth. With the current weak growth in nominal wage, the inflation fall thus will encourage expenditures. In addition, some economist argues that the current decline in inflation in the UK is typically based on the temporal factors discussed above. However, other have a fear that the extremely low inflation would result to low inflation target thus leading to zero growth in wages as well as deflationary conditions (Karras, 2016). This is what is referred to as the concern of zero inflation. Some assumptions exist that it is possible to deal with deflation. However, from the Japan experience, it is a difficult task to change deflation once it has emerged but, minimizing the rate if inflation above the targeted value is much easier. Inflation fall is a benefit to the government in the short run. Advantages that are linked indelibly will be rising than the target value, and this makes the UK government to less benefit from the bill. As a result, this enables the government to save its expenditures, improve their deficits and left with extra revenues for pre-election tax cuts. In addition, if the inflation rate is too low, the resultant would be lowering the government tax income such as VAT of products that will not increase more than the target (Owyang & Zubairy, 2015).
In the short run, inflation fall could be warmly welcomed by the ordinary citizen within the public sector. This will benefit them from low prices of goods and services as well have a feeling of high disposable revenue. As a result of good feeling, people gain much confident to invest, growth and spending. In the current UK economic climate, low inflation is a blessing in disguise (Karras, 2016). However, a real danger exists when the economy gets stuck in a period deflation, and this results in all challenges related to deflation become more prevalent and start holding to a normal economic development.
Karras, G. (2016). Can a Higher Inflation Target Reduce Inflation Volatility? Metroeconomica. doi:10.1111/meca.12142
Kassaipour, N., Taghavi, M., & Ghadimi, M. (2012). The effect of fiscal policy regarding government spending on private consumption in recessions and booms in Iran. Management Science Letters, 2(7), 2521-2524. doi:10.5267/j.msl.2012.07.013
Owyang, M., & Zubairy, S. (2015). Who Benefits from Increased Government Spending? A State-Level Analysis. SSRN Electronic Journal. doi:10.2139/ssrn.1352087
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