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Fiscal policy and public debt. Topic: fiscal policy

The state budget is a balance of state revenues and expenditures for a certain period of time (usually a year), which is the main financial plan of the country, which, after its adoption by the legislative body (parliament, state duma, congress, etc.), acquires the force of law and is mandatory for execution.

In the performance of its functions, the state bears numerous costs. By purpose, state expenditures can be divided into expenditures:

For political purposes: 1) spending on national defense and security, ie. maintenance of the army, police, courts, etc.; 2) expenses for the maintenance of the state administration apparatus

For economic purposes: 1) the cost of maintaining and ensuring the functioning of the public sector of the economy, 2) the cost of assistance (subsidizing) to the private sector of the economy

For social purposes: 1) social security expenses (payment of pensions, scholarships, allowances); 2) expenditures on education, healthcare, development of fundamental science, environmental protection.

From a macroeconomic point of view, all government spending is divided into:

public procurement of goods and services (their value is included in GDP);
transfers (their value is not included in GDP);
interest payments on government bonds (public debt servicing).

The main sources of state revenue are:

taxes (including social security contributions);
profits of state enterprises;
seigniorage (income from the issue of money);
income from privatization.

Types of states of the state budget

The difference between state revenues and expenditures is the balance (state) of the state budget. The state budget can be in three different states:

1) when budget revenues exceed expenditures (T > G), the budget balance is positive, which corresponds to a surplus (or surplus) of the state budget;

2) when revenues are equal to expenditures (G = T), the budget balance is zero, i.e. the budget is balanced;

3) when budget revenues are less than expenditures (T

At different phases of the economic cycle, the state budget is different. In a recession, budget revenues are reduced (because business activity and, consequently, the tax base is reduced), so the budget deficit (if it existed initially) increases, and the surplus (if there was one) decreases. In a boom, on the contrary, the budget deficit decreases (since tax revenues, i.e., budget revenues, increase), and the surplus increases.

State budget deficit and its types

There are structural, cyclical and actual budget deficits. The structural deficit is the difference between government spending and budget revenues that would have gone into it in conditions of full employment of resources under the current taxation system:

The cyclical deficit is the difference between the actual deficit and the structural deficit:

During a recession, the actual deficit is greater than the structural deficit, since a cyclical deficit is added to the structural deficit, since during a recession Y Y*. Structural deficit is the result of stimulating discretionary fiscal policy, while cyclical deficit is the result of automatic fiscal policy, a consequence of built-in stabilizers.

There are also current budget deficit and primary deficit. The current budget deficit is the total government budget deficit. The primary deficit is the difference between the total (current) deficit and the amount of government debt service payments.

Concepts of the state budget

The attitude to the state budget deficit is usually negative. The most popular idea is a balanced budget. Historically, three concepts have been put forward regarding the state budget: 1) the idea of an annually balanced budget; 2) the idea of a budget balanced by the phases of the economic cycle (on a cyclical basis); 3) the idea of balancing not the budget, but the economy.

The concept of an annual balanced budget is that, regardless of the phase of the economic cycle, every year budget expenditures should be equal to income. This means that, for example, during a recession, when budget revenues (tax revenues) are minimal, the state must reduce public spending (government purchases and transfers) to ensure a balanced budget. And since the reduction of both government purchases and transfers leads to a decrease in aggregate demand, and, consequently, output, this measure will lead to an even deeper recession. And, conversely, if the economy is booming, i.e. maximum tax revenues, then in order to balance budget expenditures with revenues, the state must increase government spending, provoking even more overheating of the economy and, consequently, even higher inflation. Thus, the theoretical inconsistency of such an approach to budget regulation is quite obvious.

The concept of a cyclically balanced state budget is that it is not necessary to have a balanced budget every year. It is important that the budget is balanced as a whole during the economic cycle: the budget surplus, which increases during the boom (highest business activity), when budget revenues are maximum, should be used to finance the budget deficit that occurs during the recession (lowest business activity), when budget revenues fall sharply. This concept also has a significant drawback. The fact is that boom and recession phases differ in duration and depth, so the amounts of the budget surplus that can be accumulated during a boom period and the deficit that accumulates during a recession, as a rule, do not match, so a balanced budget cannot be ensured.

The concept that the goal of the state should not be the balance of the budget, but the stability of the economy, has become the most widespread. This idea was put forward by Keynes in his work "The General Theory of Employment, Interest and Money" (1936) and was actively used in the economies of developed countries until the mid-70s. According to Keynes's views, the instruments of the state budget (government purchases, taxes and transfers) should be used as counter-cyclical regulators, stabilizing the economy at different phases of the cycle. If the economy is in a recession, then the government, in order to stimulate business activity and ensure economic recovery, should increase its spending (government purchases and transfers) and reduce taxes, which will lead to an increase in aggregate demand. And, conversely, if the economy is booming (overheating), then the state should cut costs and increase taxes (revenues), which hinders business activity and "cools" the economy, leading to its stabilization. The state of the state budget does not matter. Since Keynes's theory was aimed at developing recipes for combating a recession, with a recession in the economy, which was proposed to be carried out using, first of all, budgetary regulation tools (increase in government purchases and transfers, i.e. budget expenditures and tax cuts, i.e. . budget revenues), then this theory is based on the idea of "deficit financing". As a result of the use of Keynesian recipes for regulating the economy in most developed countries in the 1950s and 1960s, the problem of chronic state budget deficit became one of the main macroeconomic problems by the mid-1970s, which was one of the reasons for the intensification of inflationary processes.

Ways to finance the state budget deficit

The state budget deficit can be financed in three ways: 1) by issuing money; 2) at the expense of a loan from the population of their country (domestic debt); 3) at the expense of a loan from other countries or international financial organizations (external debt).

The first method is called the emission or cash method, and the second and third are called the debt method of financing the state budget deficit. Consider the advantages and disadvantages of each method.

Emission method of financing the state budget deficit. This method consists in the fact that the state (Central Bank) increases the money supply, i.e. issues additional money into circulation, with the help of which it covers the excess of its expenses over income. Advantages of the emission method of financing:

The growth of the money supply is a factor in the increase in aggregate demand and, consequently, output. An increase in the money supply causes a decrease in the interest rate in the money market (decrease in the price of a loan), which stimulates investment and ensures the growth of total spending and total output. This measure, therefore, has a stimulating effect on the economy and can serve as a means of exiting a recession.

This is a measure that can be implemented quickly. An increase in the money supply occurs either when the Central Bank conducts operations on the open market and buys government securities and, paying sellers (households and firms) for the cost of these securities, issues additional money into circulation (it can make such a purchase at any time and at any time). required amount), or through the direct issue of money (for any required amount).

Disadvantages:

The main drawback of the emission method of financing the state budget deficit is that in the long run, an increase in the money supply leads to inflation, i.e. it is an inflationary way of financing.

This method can have a destabilizing effect on the economy during a period of overheating. A decrease in the interest rate as a result of an increase in the money supply stimulates an increase in total spending (primarily investment) and leads to an even greater increase in business activity, widening the inflationary gap and accelerating inflation.

Financing the state budget deficit at the expense of domestic debt. This method consists in the fact that the state issues securities (government bonds and treasury bills), sells them to the public (households and firms) and uses the proceeds to finance the excess of government spending over income.

Advantages of this financing method:

It does not lead to inflation, since the money supply does not change, i.e. it is a non-inflationary way of financing.

This is a fairly quick way, since the issue and placement (sale) of government securities can be ensured quickly. The population in developed countries is happy to buy government securities, because they are highly liquid (they can be easily and quickly sold - this is “almost money”), highly reliable (guaranteed by the government, which is trusted) and quite profitable (interest is paid on them).

Disadvantages:

Debts must be paid. Obviously, the population will not buy government bonds if they do not generate income, i.e. unless interest is paid on them. The payment of interest on government bonds is called "servicing the public debt." The larger the public debt (i.e., the more government bonds issued), the larger the amounts that must go to service the debt. And the payment of interest on government bonds is part of the state budget expenditures, and the more they are, the greater the budget deficit. It turns out a vicious circle: the state issues bonds to finance the state budget deficit, the payment of interest on which provokes an even greater deficit.

Paradoxically, this method is not non-inflationary in the long run. Two American economists Thomas Sargent (Nobel Prize winner) and Neil Wallace proved that debt financing of the state budget deficit in the long run can lead to even higher inflation than emission financing. This idea is known in the economic literature as the Sargent-Wallace theorem. The fact is that the state, financing the budget deficit through an internal loan (issuing government bonds), as a rule, builds a financial pyramid (refinances the debt), i.e. pays off past debts with a loan in the present, which will need to be repaid in the future, and the repayment of the debt includes both the amount of the debt itself and the interest on the debt. If the government uses only this method of financing the public deficit, then there may come a point in the future when the deficit is so large (i.e., so many government bonds will be issued and the cost of servicing the public debt will be so significant) that its financing by debt way will be impossible, and equity financing will have to be used. But at the same time, the emission value will be much larger than if it is carried out in a reasonable amount (in small portions) every year. This can lead to a surge in inflation and even cause high inflation.

As Sargent and Wallace have shown, in order to avoid high inflation, it is wiser not to abandon the issuance method of financing, but to use it in combination with debt.

A significant drawback of the debt method of financing is the "crowding out effect" of private investment. We have already considered its mechanism when analyzing the shortcomings of fiscal policy in terms of the impact on the economy of an increase in budget expenditures (government purchases and transfers) and a reduction in budget revenues (taxes), which generates a budget deficit. Now consider the economic meaning of the "crowding out effect" in terms of financing this deficit. This effect is that an increase in the number of government bonds in the securities market leads to the fact that part of household savings is spent on the purchase of government securities (which provides financing for the government budget deficit, i.e. goes to non-productive purposes), and not to the purchase of securities of private firms (which ensures the expansion of production and economic growth). This reduces the financial resources of private firms and therefore investment. As a result, the volume of production is reduced.

The economic mechanism of the “crowding out effect” is as follows: an increase in the number of government bonds leads to an increase in the supply of bonds in the securities market. An increase in the supply of bonds leads to a decrease in their market price, and the price of a bond is inversely related to the interest rate, therefore, the interest rate rises. An increase in the interest rate causes a reduction in private investment and a reduction in output.

The debt method of financing the state budget deficit can lead to a deficit in the balance of payments. It is no coincidence that in the mid-1980s the term "twin-deficits" appeared in the United States. These two types of deficits can be interdependent. Recall the identity of injections and withdrawals: I + G + Ex = S + T + Im, where I is investment, G is government purchases, Ex is exports, S is savings, T is net taxes, Im is imports.

Regroup: (G - T) \u003d (S - I) + (Im - Ex)

From this equality it follows that with an increase in the state budget deficit, either savings should increase, or investment should decrease, or the trade deficit should increase. The mechanism of the impact of the growth of the state budget deficit on the economy and its financing at the expense of domestic debt has already been considered in the analysis of the “crowding out effect” of private investment and output as a result of an increase in the interest rate. However, along with internal crowding out, an increase in the interest rate leads to a crowding out of net exports, i.e. increases the trade deficit.

The mechanism of external crowding out is as follows: an increase in the domestic interest rate compared to the world rate makes the securities of this country more profitable, which increases the demand for them from foreign investors, which in turn increases the demand for the national currency of this country and leads to an increase in the exchange rate of the national currency , making the goods of a given country relatively more expensive for foreigners (foreigners now have to exchange more of their currency in order to buy the same amount of goods from this country as before), and imports become relatively cheaper for domestic buyers (who now have to exchange less national currency to buy the same amount of imported goods), which reduces exports and increases imports, causing a reduction in net exports, i.e. causes a trade deficit.

Financing the state budget deficit with the help of external debt. In this case, the budget deficit is financed by loans from other countries or international financial organizations (International Monetary Fund - IMF, World Bank, London Club, Paris Club, etc.). Those. it is also a type of debt financing, but through external borrowing.

Advantages of this method:

Opportunity to receive large sums
Non-inflationary character

Disadvantages:

The need to repay the debt and service the debt (i.e., the payment of both the amount of the debt itself and the interest on the debt)
The impossibility of building a financial pyramid to pay off foreign debt
The need to divert funds from the country's economy to pay off external debt and service it, which leads to a reduction in domestic production and a recession in the economy
With a deficit in the balance of payments, the possibility of depleting the country's gold and foreign exchange reserves

So, all three ways of financing the state budget deficit have their advantages and disadvantages.

Public debt, its types and consequences

Public debt is the sum of accumulated budget deficits adjusted for budget surpluses (if any). Government debt is thus a measure of a stock because it is calculated at a specific point in time (for example, as of January 1, 2000) as opposed to the government deficit, which is a measure of flow because it is calculated over a specific period of time (per year). There are two types of public debt: 1) internal and 2) external. Both types of public debt have been discussed above.

It is impossible to determine its burden on the economy by the absolute value of public debt. For this, the ratio of the amount of public debt to the amount of national income or GDP is used, i.e. d = D/Y. If the growth rate of debt is less than the growth rate of GDP (economy), then the debt is not terrible. With low economic growth rates, public debt becomes a serious macroeconomic problem.

The danger of a large public debt is not that the government may go bankrupt. This is impossible, because, as a rule, the government does not repay the debt, but refinances, i.e. builds a financial pyramid, issuing new government loans and making new debts to pay off old ones. In addition, the government may raise taxes or issue additional money to finance its spending.

Serious problems and negative consequences of a large public debt are as follows:

The efficiency of the economy decreases, since funds are diverted from the manufacturing sector of the economy both for servicing the debt and for paying the debt amount itself;
Redistributed income from the private sector to the public sector;
Income inequality is on the rise;
Debt refinancing leads to an increase in the interest rate, which causes a crowding out of investments in the short run, which in the long run can lead to a reduction in the capital stock and a reduction in the country's productive potential;
The need to pay interest on debt may require higher taxes, undermining economic stimulus
There is a threat of high inflation in the long run
Places the burden of debt repayment on future generations, which can lead to a decline in their level of well-being
Interest or principal payments to foreigners cause a certain part of GDP to be transferred abroad
There may be a threat of a debt and currency crisis

The implementation of fiscal policy directly affects the size of the budget deficit and public debt.

The state budget- balance of planned expenditures and government revenues for a certain period, usually a year, containing a list of spending programs (education, defense, government, etc.), as well as sources of income (income taxes, excise taxes, etc.), used by the government to control its fiscal activities. The state budget is actual, structural and cyclical.

The state budget deficit () is the difference between the expenditures and revenues of the state for a certain period. If all government revenues are taxes, then . By definition . When T > G, that is, there is a budget surplus.

The public debt is the algebraic sum of budget deficits and surpluses for all past years.

The main adverse consequences for the economy of the growth of public debt are:

1. the need to reduce consumption in order to increase the export of goods and services in payment of interest on external debt;

2. the transfer of funds into public debt, leading to a reduction in investment and an increase in the interest rate;

3. reduced incentives to work as a result of higher tax rates to pay interest on domestic debt;

When analyzing the interdependence between the economic policy of the state and the state of its budget, two components of the budget deficit are distinguished: structural deficit and cyclical deficit.

Under structural deficit is understood as the difference between current government spending and those revenues of the state budget that would have gone into it in conditions of full employment under the existing taxation system.

Cyclical deficit there is a difference between the actual deficit and the structural deficit.

During a recession, a cyclical deficit is added to the structural deficit; during a boom, the structural deficit decreases by the absolute value of the cyclical deficit. The actual deficit during a recession is larger, and during a boom, the structural deficit is smaller.

Structural deficit is the result of stimulating discretionary fiscal policy of the state, and cyclical deficit is the result of built-in stabilizers.

The size of the observed deficit cannot be used to judge how actively the government is pursuing fiscal policy. During a recession, a deficit may indicate insufficient public spending: it is possible that an increase in it would lead to an increase in real national income and a reduction in the deficit.

The degree of stabilized impact of the budget deficit depends on how it is financed. The deficit is financed by:

1. saving resources for the maintenance of the state apparatus;

2. issue of internal and external government loans in the form of securities;

3. loans from off-budget funds (insurance funds, unemployment insurance fund, pension fund and others);

4. monetary issue of money (monetization).

If the budget deficit persists for a long time, then the amount of public debt rises steadily.

domestic debt- this is the debt of the state to the population, economic entities of their country.

External debt- debt to individuals, legal entities, governments of other countries.

Domestic debt is generated by debt financing of the budget deficit. Government loans are issued for various periods, so government debt is short-term (up to one year), medium-term (up to five years) and long-term (over five years). The most burdensome are short-term debts, as they mature very quickly, and the interest on such loans is very high. Most economists argue that the growth of domestic debt cannot lead to the bankruptcy of the nation, since it is a debt to itself. In addition, the state always has the opportunity to finance it by raising tax rates, issuing money, refinancing.

However, there are some negative effects of domestic debt. Firstly, for countries with a low level of income, and hence savings, the purchase by the population, economic entities of government debt is an alternative to investing free cash in production. Therefore, a rapid increase in the issuance of government securities can lead to a reduction in fixed capital. Secondly, the state, by selling securities, competes in the loan capital market with the private sector. As a result of competition, the loan interest rate rises, which leads to a reduction in private investment in the country's economy. Thirdly, the amounts of interest payments on domestic debt are increasing, which can be very burdensome, especially during stagnation and decline in production. All this makes it necessary to monitor the dynamics of the ratio between domestic debt and the volume of national production. In the event that the growth rate of domestic debt outstrips the growth rate of GNP, the government needs to take certain measures to manage the debt. This may be inflation, the introduction of special taxes and budget sequestration.

External debt can appear for two reasons: as a result of direct borrowing from foreign states, private companies and through the sale of government securities to non-residents. The consequences of external debt are more severe for the country than internal ones.

1.4.2 MONETARY POLICY

Unlike fiscal policy, the activities of which are aimed directly at the market of goods, when conducting monetary policy, the object of influence is the money market. The essence of monetary policy is to influence the economic environment by changing the amount of money in circulation. Therefore, the main role in conducting monetary policy belongs to the Central Bank (CB). The ultimate goal of monetary policy is to ensure price stability, full employment, real output growth, and balance of payments stability. The fulfillment of this final task is impossible without the implementation of intermediate tasks: regulation of the volume of money supply, the level of interest rates, the volume of loans, exchange rates.

Monetary policy instruments are:

1. Money emission - the growth of cash in circulation.

2. Accounting policy - the establishment of the Central Bank of a certain percentage, called the discount rate or the refinancing rate, for providing a loan to a commercial bank to replenish reserves.

3. Open market policy - sale and purchase of securities by the Central Bank on public institutional platforms for the sale and purchase of securities, and not in the order of agreements. It is today the main instrument of monetary policy.

4. Monetary policy - providing a direct impact on the value of the money supply in the country. Selling currency, the Central Bank reduces the amount of money, buying - increases.

5. Reserve policy - the establishment of the Central Bank of the standards for the mandatory deduction into reserves of a part of the funds received on the deposit accounts of commercial banks (and other financial instruments). Required reserves serve as an insurance fund for deposits. An increase in the minimum reserve coverage rate of the Central Bank reduces the lending capacity of commercial banks, thereby limiting the amount of money in circulation.

fiscal policy. Budget deficit and public debt

Discretionary fiscal policy

Discretionary fiscal policy is the deliberate manipulation of government spending and taxes to change real national output and employment, control inflation, and boost economic growth.

Suppose the government decides to purchase $20 billion worth of goods and services, no matter what the NNP is. By adding government purchases to private spending (C + In + Xn), we get a higher level of total spending, i.e. C + + In Xn + G, where G is government or government spending. An increase in government spending, as well as an increase in private spending, will lead to an increase in the equilibrium NNP. According to Keynes, government spending is subject to a multiplier effect. If a $20 billion increase in government purchases caused an $80 billion increase in equilibrium NNP, then the multiplier in this case is 4.

It is important to emphasize that the $20 billion increase in government spending is not funded by increased tax revenues, as tax increases lead to a decrease in equilibrium NNP. To have a stimulating effect, government spending must be accompanied by a budget deficit. Keynes's fundamental recommendations included increasing deficit financing to overcome a recession or depression.

What are the consequences of cutting government spending? In any case, the result is a multiple reduction in the equilibrium NNP. If government spending is reduced from $20 billion to $10 billion, then the equilibrium NNP will fall by $40 billion with a multiplier of 4.

The government not only spends money, but also collects taxes. How does taxation affect the equilibrium NNP? Answer: an increase in taxes will cause a reduction in the value of the equilibrium NNP (Fig. 32.1).

Balanced budget multiplier

The balanced budget multiplier shows that equal increases in government spending and taxes cause an increase in the equilibrium NNP by the amount of their increase.

For example, an increase in G and T by $20 billion causes an increase in NNP by $20 billion.

At the same time, changes in government spending have a larger impact on total spending than changes in taxes of the same magnitude. Government spending has a direct impact on total spending.

A change in taxes, on the other hand, indirectly affects total spending, through changes in income after taxes and through changes in consumption. The basis of the so-called balanced budget multiplier is revealed in Figure 32.2.

The balanced budget multiplier is equal to one. The same increase in taxes and government spending will cause an increase in NNP by an amount equal to the increase in government spending and taxes. With a marginal propensity to consume (MPC) of 3/4, a $20 billion increase in taxes would reduce after-tax income by $20 billion and reduce consumer spending by $15 billion. Since the multiplier is 4, NNP will fall by 60 $20 billion increase in government spending, however, would cause a more than offset increase in NNP of $80 billion. Therefore, the net increase in NNP would be $20 billion, which is equal to the increase in government spending and taxes.

The balanced budget multiplier works regardless of the marginal propensities to consume and save.

Fiscal Policy Goals

The fundamental goal of fiscal policy is to eliminate unemployment or inflation. During the recession, the question of the elimination of unemployment, therefore, of stimulating fiscal policy, is on the agenda. Stimulating fiscal policy includes: 1) an increase in government spending, or 2) tax cuts, or 3) a combination of the first and second. If there is a balanced budget, fiscal policy should move in the direction of the government's budget deficit during a recession or depression. Conversely, if the economy is experiencing inflation caused by excess demand, this case is consistent with contractionary fiscal policy. A contractionary fiscal policy includes: 1) reducing government spending, or 2) increasing taxes, or 3) a combination of both. Fiscal policy should be guided by a government budget surplus if the economy is faced with the problem of controlling inflation.

However, it must be remembered that the size of the NNP depends not only on the difference between government spending and taxes (ie, on the size of the deficit or surplus), but also on the absolute size of the budget. In our illustration of the balanced budget multiplier, a $20 billion increase in G and T increased NNP by $20 billion. If G and T increased by only $10 billion, then the equilibrium NNP would increase by only $10 billion.

Methods of financing deficits and ways to get rid of budget surpluses. Given the size of the state budget deficit, its stimulating effect on the economy will depend on the methods of financing the deficit. Similarly: given the size of the budget surplus, its inflationary impact depends on how it will be liquidated.

There are two different ways in which the federal government can finance the deficit: by borrowing from the public (through the sale of interest-bearing paper) or by issuing new money to its creditors. The impact on total costs will be different in each case.

1. Borrowing.

If the government enters the money market and places its loans here, it enters into competition with private entrepreneurs for financial resources. Consequently, government borrowing will tend to raise the level of the interest rate and thus push out some private investor spending and interest-sensitive consumer spending.

2. Making money.

If government spending in a deficit budget is financed by issuing new money, pushing out private investment can be avoided. Federal spending can increase without having a detrimental effect on investment or consumption. Thus, the creation of new money is by nature a more stimulating way of financing deficit spending than is the expansion of borrowing.

Inflation caused by excess demand requires fiscal action on the part of the government, which could create a budget surplus. However, the anti-inflationary effect of such a surplus depends on how the government uses it. There are two possible ways here:

1. Debt repayment.

Since the federal government has accumulated debt, it is logical that the government could use additional funds to pay off the debt. This measure, however, may somewhat reduce the anti-inflationary impact of the budget surplus. By buying back its debt obligations from the public, the government transfers its excess tax revenue back to the money market, causing the interest rate to fall and thus stimulating investment and consumption.

2. Withdrawal from circulation.

The government can achieve greater anti-inflationary impact of its budget surplus simply by withdrawing these excess amounts, suspending any subsequent use of them. Excess withdrawal means that the government takes some amount of purchasing power out of the general flow of income and expenditure and retains it. If excess tax revenues are not re-injected into the economy, then there is no possibility of spending even some of the budget surplus, i.e. there is no longer any chance that these funds will create an inflationary effect that counteracts the deflationary effect of the surplus as such. It can be concluded that the complete withdrawal of the budget surplus is a more restrictive measure compared to using the same funds to pay off the public debt.

Which is preferable: government spending or taxes?

The answer to this question depends to a large extent on the individual perspective of the politician and on how large the public sector is. "Liberal" economists who believe that the public sector should be expanded may recommend expanding aggregate spending during a downturn by increasing government purchases and limiting aggregate spending during rising inflation by increasing taxes. Conversely, "conservative" economists who believe that the public sector is unnecessarily bloated and inefficient may argue for increasing aggregate spending during a downturn through tax cuts, and in a period of rising inflation, suggest reducing aggregate spending by cutting government spending. It is important to note that an active fiscal policy aimed at stabilizing the economy can rely on both an expanding and shrinking public sector.

Non-Discretionary Fiscal Policy: Built-in Stabilizers

When considering discretionary fiscal policy, the existence of a constant tax was assumed, which ensures the withdrawal of the same tax amount at different values of NNP. With a non-discretionary fiscal policy, built-in, or automatic, stability arises from the fact that in reality the tax system provides for the withdrawal of such a net tax, which changes in proportion to the value of NNP. The net tax is equal to the total tax minus transfer payments and subsidies. Almost all taxes will increase tax revenue as NNP rises. In particular, the personal income tax has progressive rates and, as the NNP rises, gives a more than proportional increase in tax revenues. Moreover, as NNP rises and purchases of goods and services grow, revenues from corporate income tax, turnover tax and excises will increase. And likewise, payroll taxes increase as new jobs are created in the course of the economic recovery. On the contrary, if NNP falls, tax revenues from all these sources will fall. Transfer payments (or "negative taxes") have exactly the opposite behavior. Unemployment benefits, poverty benefits, subsidies to farmers - they all decrease during an economic recovery and increase during a downturn in production.

If tax revenue fluctuates in the same direction as NNP, then deficits, which tend to automatically appear during downturns, help to overcome the downturn. On the contrary, budgetary surpluses, which tend to automatically appear during economic booms, will help to overcome possible inflation.

Figure 32.3 is a good illustration of how the tax system improves built-in stability. Government spending (G) in this scheme is assumed to be given and independent of NNP; expenditures are approved by Parliament at a permanent fixed level. But Parliament does not determine the amount of tax revenue, rather, it determines the size of tax rates. Tax revenues then fluctuate in the same direction as the level of NNP that the economy reaches. A direct relationship between tax revenues and NNP is fixed in a gently rising line T.

The economic significance of these direct relationships between tax revenues and the value of NNP is of particular importance due to the fact that: 1) taxes represent an leakage or loss of potential purchasing power in the economy and 2) from the point of view of stability, it is desirable to increase the volume of such leakages (withdrawals) in periods when the economy moves towards inflation, and, conversely, the amount of withdrawals of purchasing power should be minimized during a period of slowing growth. The tax system depicted in Figure 32.3 creates some element of stability in the economy by automatically causing changes in tax revenues, and hence in the government budget, that counteract both inflation and unemployment. So, a built-in stabilizer is any measure that tends to increase the government budget deficit (or reduce its surplus) during a recession and increase its surplus (or reduce its deficit) during an inflationary period without the need for any special steps from the outside. government. This is exactly what the tax system does. As NNP rises during a period of prosperity, tax revenue automatically rises and—because it is a "leak"—contains economic recovery. In other words, as the economy moves towards a higher level of NNP, tax revenue increases automatically and tends to eliminate the budget deficit and create a budget surplus. Conversely, when NNP declines during a downturn, tax revenues automatically fall, and this reduction cushions the economic downturn: i.e. with NNP falling, tax revenue also falls and pushes the government budget from a budget surplus to a deficit. The built-in stability provided by the tax system cushioned the severity of economic fluctuations. However, stabilizers are not always able to correct undesirable changes in the equilibrium NOR.

All stabilizers do is limit the scope or depth of economic fluctuations. Therefore, Keynesian economists agree that to correct inflation or recession, discretionary fiscal measures are required on the part of the government, i.e. changes in tax rates, and government spending. In the US today, built-in stabilizers are estimated to be able to reduce fluctuations in national income by about one-third.

Crowding effect

The essence of the crowding out effect is that an stimulating (deficit) fiscal policy will lead to an increase in interest rates and a reduction in investment spending, thus weakening or completely undermining the stimulating effect of fiscal policy.

It looks like this:

Suppose the economy is in a recession and the government, as part of its current fiscal policy, increases government spending. The government is now entering the money market to finance the deficit. The subsequent increase in the demand for money raises interest rates; the price paid for borrowing money. Because spending changes inversely with interest rates, some investments will be rejected or crowded out. Then an increase in government spending can cause a decrease in private investment. If investment were reduced by the same amount as government spending increased, then fiscal policy would be completely ineffective.

The extent of the "crowding out effect" is the subject of lively debate. For example, some economists believe that if unemployment is high, this crowding out will be negligible. The rationale here is that, in a downturn, the stimulus created by increased government spending can improve profitability expectations among entrepreneurs, which is an important determinant of investment demand. If the demand curve for investment shifts to the right, then investment spending should not fall—it may even increase even though the interest rate rises.

Fiscal policy in an open economy

Additional difficulties in the implementation of fiscal policy arise when the economy is part of the global economy, i.e. open economy.

It is known that developments and economic policy measures taken abroad affect net exports and the economy. As such, one may be exposed to unanticipated international shocks to aggregate demand, which could reduce NNP and invalidate fiscal policy measures. The issue is that increasing participation in the global economy brings with it the complexities of international interdependence, along with the benefits of participating in specialization and trade. An example is the net export effect that operates through international trade, undermining the effectiveness of fiscal policy. The bottom line is this: By cutting the domestic interest rate, contractionary fiscal policy tends to increase net exports. Conversely, "simulating fiscal policy can raise domestic rates and ultimately reduce net exports.

Supply-side fiscal policy

It was assumed that fiscal policy affects only demand, i.e. on the amount of total spending and aggregate demand. But economists have recognized that fiscal policy - especially changes in taxes - can change aggregate supply and therefore affect the changes that fiscal policy can cause in the price level - real production ratio.

Supporters of the concept of "supply-side economics" believe that lower tax rates should not necessarily lead to a reduction in tax revenues. In fact, tax cuts can be expected to increase tax revenues through significant increases in national output and income. This expanded tax base will ensure that tax revenues rise even at lower rates. Thus, from the point of view of Keynesian approaches, tax cuts will cause a reduction in tax revenues and increase the budget deficit, the "supply-side" approach suggests that tax cuts can be arranged in such a way that it will increase tax revenues and reduce deficits.

Most economists are wary of the “supply-side” interpretation of tax cuts described above: 1) they feel that the expected positive impact of tax cuts on incentives to work, save, and invest, as well as risk-taking, may in fact be less strong, as supporters of "supply-side economics" hope; 2) any shifts in the aggregate supply curve to the right are long-term in nature, while the impact on demand will be felt in the economy much faster.

budget deficit

The budget deficit is the amount by which government spending exceeds its revenue in a given year.

The concept of budget regulation.

A. Annually balanced budget. Before the Great Depression in the 1930s an annually balanced budget was generally recognized as a desirable goal of public finances. But an annually balanced budget largely excludes government fiscal activity as a counter-cyclical and stabilizing force.

The annually balanced budget must: 1) either increase tax rates; 2) either reduce government spending; 3) or use a combination of these two measures. The problem is that all these measures are deterrent in nature; each further reduces rather than stimulates aggregate demand. Likewise, an annually balanced budget will cause inflation to accelerate. As soon as monetary income rises in the process of inflation, tax revenues automatically increase. In order to eliminate future budgetary surpluses, the government in this situation must: 1) either reduce tax rates; 2) or increase government spending; 3) or use a combination of both approaches. It is clear that the use of any of these three approaches will increase the inflationary phenomenon in the economy.

So, the annually balanced budget is not economically neutral; such a policy is pro-, not anti-cyclical.

"Conservative" economists have come out in favor of a budget that is balanced on an annual basis, thinking most of all not about the dangers of deficits and rising public debt as such, but that, from their point of view, an annually balanced budget is absolutely necessary in order to limit unwanted and uneconomic expansion of the public sector. Budget deficits, from their point of view, are a clear demonstration of political irresponsibility.

Deficits allow politicians to give back to society the benefits of increased government spending programs while avoiding the associated costs of higher taxes. In other words, these "fiscal conservatives" believe that government programs tend to grow faster than they should, because there is much less public opposition to growth when it is funded by growing deficits rather than tax increases.

Conservative economists and related politicians would like to have legislation or a constitutional amendment introducing a balanced budget to slow down the growth of government programs. They see the rise in deficits as a manifestation of a more fundamental problem - government encroachment on the very existence of the private sector.

Balanced budget on a cyclical basis. The idea of a cyclically balanced budget assumes that the government implements counter-cyclical policies and at the same time balances the budget. In this case, the budget does not have to be balanced annually. It is enough that it is balanced during the economic cycle.

The rationale for this budget concept is fairly simple. To counter the recession, the government must cut taxes and increase spending, i.e. deliberately causing a deficit. In the ensuing inflationary boom, taxes must be raised and government spending cut. The resulting budget surplus can be used to cover the federal debt incurred during the recession. Thus, government fiscal action should create a positive counter-cyclical force, and the government, even under this condition, can balance the budget, not on an annual basis, but over a period of several years.

The key problem with this concept of the budget is that the ups and downs in the economic cycle can be unequal in depth and duration and, therefore, the task of stabilization conflicts with the task of balancing the budget during the cycle. For example, a long and deep recession followed by a short and modest period of prosperity would mean a large deficit in a recession, little or no surplus in a period of prosperity, and therefore a cyclical budget deficit.

State debt

The national debt is the total accumulated sum of all federal government budget surpluses less any deficits that have occurred in the country.

Public debt arises as a result of increased military spending, especially during periods of economic downturns, and tax cut policies (both income and business profits). The federal budget is primarily a tool for achieving and maintaining macroeconomic stability. The government should not hesitate to introduce any deficits or surpluses to achieve this goal.

The level of public debt requires annual interest payments. If debt growth is not used, these annual interest payments must be made out of tax revenue. Such additional taxes can offset the desire to take risks, the desire to innovate, to invest, to work. The existence of large public debt can undermine economic growth. The ratio of interest payments to GNP shows the level of taxation that is required to pay interest on the debt. Therefore, some economists are concerned about the fact that this figure has increased dramatically in recent years.

Obviously, the payment of interest and the amount of the debt requires the transfer of part of the national real output to the disposal of other countries. It should be noted that the share of public debt attributable to foreign creditors has been increasing in recent years in all countries. This is a cause for serious concern, especially for Russia.

Can the state shift the real economic burden of its debt onto future generations, or can it leave future generations with smaller capital assets - say, a smaller "national factory"? This possibility is related to the crowding out effect, which is determined by the fact that deficit financing increases interest rates and, therefore, reduces investment costs. If this happens, succeeding generations will inherit an economy with reduced productive capacity, and hence, other things being equal, the standard of living will be lower than in other cases.

There are several factors behind the growing concerns about deficits and public debt:

the question of the size of the debt remains open;

interest payments associated with government debt are rising very rapidly;

it is worrying that the annual deficits were formed in a peaceful economy, which operates very close to the level of full employment.

The large deficits that exist during the period of full employment raise several questions:

1) the most significant likelihood of "crowding out" occurs when the economy is operating at full employment;

2) the stimulus effect of such deficits can cause inflation of excess demand;

3) a large budget deficit makes it difficult for the country to achieve a balance in international trade. Large annual budget deficits tend to stimulate imports and deter exports and often lead to a sale of national wealth.

In financing its deficits, the government must enter the capital market and compete with the private sector for funds. This pushes interest rates up.

Rising interest rates, in turn, also have two important consequences.

First, it does not encourage private investment spending.

The consensus is that deficits are pushing the economy down a path of slow growth in the long run.

Second, higher interest rates on government and private securities make financial investments more attractive to foreigners. The influx of foreign funds can help finance both the deficit and private investment. But such an inflow of funds represents an increase in external debt. And the payment of interest and the repayment of debts to foreigners causes a reduction in future national production.

Third, the reduction in net exports has a dampening effect on the economy. Note that the above considerations reinforce our earlier conclusion that an expansionary fiscal policy can be much less stimulating for an economy than the simple Keynesian model suggests. Thus, the stimulating effect of the deficit can be offset by both the crowding out effect and the negative net export effect caused by the deficit.

Bibliography

For the preparation of this work, materials from the site http://matfak.ru/

3. The state budget. Budget deficit and public debt.

The state budget - it is a fund of financial resources that exists in the form of a balance of cash income and expenditure of the state for a certain period of time. Functions of the state budget redistribution of national income (from 20 to 60%); stabilization of social reproduction, economy; implementation of state social policy.

Income budget items: tax revenues (direct and indirect) – up to 90% of receipts; non-tax revenues (income from the use and sale of state property, targeted transfers to the state); government loans (issuance and sale of securities); issue of money.

Expenditure items of the budget: financing of socio-cultural institutions (education, science, culture, healthcare); measures to finance the national economy (industry, energy, transport, agriculture, etc.); expenses for the liquidation of the disaster at the Chernobyl nuclear power plant; defense spending (including border and railway troops, defense, sports and technical societies); replenishment of state stocks and reserves; maintenance of internal affairs bodies (including internal troops); public administration; service of the public debt.

budget deficit – Excess of spending over budget revenues Surplus– excess of income over expenses.

Reasons for the budget deficit:

implementation of major state programs for the development of the economy;

growth of administrative expenses, subsidies to unprofitable enterprises;

militarization, the growth of state military spending;

military and natural disasters;

economic crises.

There are structural and cyclic deficits. Structural called the deficit that occurs at a given level of government spending, taxes and the natural rate of unemployment. The real deficit may exceed the structural deficit in the event of a decline in production (as a result, revenues are reduced, tax revenues to the treasury are reduced, and government spending on benefits and social programs is increased). The difference between real and structural deficit is called cyclical budget deficit.

The level of the state budget deficit – the ratio of the absolute value of the deficit to the volume of the budget in terms of expenditures or to the volume of GNP (the financial situation is normal when the budget deficit does not exceed 4-5% of GNP).

Options for financing the state budget deficit

1) increase in taxes (increase in state taxes);

2) issue of the required amount of money;

3) issue of state loans;

4) attraction of external loans;

5) sale of state property (during the transitional period).

The concept of balancing the state budget deficit

annual balancing of income and expenses – each financial year, revenues must equal expenses (the possibility of fiscal regulation is limited depending on the state of the economy, which leads to a budget deficit or surplus);

business cycle – during a downturn in production, the government increases spending – the growth of the deficit, and during the period of recovery – reduces costs, which increases the surplus of income, which at the end of the industrial cycle will cover the deficit;

functional finance – ensuring macroeconomic balance, even if this leads to a government budget deficit.

A persistent budget deficit leads to an increase in public debt.

State debt – the amount of debt of the state to internal or external individuals and legal entities. (The sum of budget deficits of previous years minus budget surpluses).

domestic debt – debt of the government to residents of the given country (owners of securities). They make loans, deposits of the population, banknotes, lottery tickets, short-term obligations.

External debt is the debt of the state to other countries, foreign companies, banks, international organizations (IMF, IBRD). It is estimated by such indicators as its share in GNP, the ratio of the annual volume of payments on external debt to the volume of foreign exchange earnings for the year (which should not exceed 25%).

Domestic Debt Issues:

Paying interest on debt increases income inequality (securities are bought by the wealthiest citizens, and the financing of interest comes from taxes that everyone pays);

to pay off debt and pay interest, they raise tax rates, and this reduces incentives for investment, slows down the development of the economy, and causes social tension in the country;

the issuance of new government securities into circulation leads to an increase in the loan interest rate, which negatively affects the process of investing capital;

a large domestic debt scares off foreign investors and makes the population of the country uncertain about the future.

External debt problems are associated with the need to increase exports and reduce imports, while the increase in revenue is used not for development purposes, but for debt repayment, which reduces the pace of development and the standard of living of the population.

It was said above that the country's budget for 80% consists of tax deductions, which are redistributed taking into account the state needs of the country. Therefore, the concept of "fiscal policy" is currently used. This policy is associated with measures for the formation of the state budget and its use. The concept of "fiscal (fiscal) policy" is often used.

fiscal(budget and tax) politics- government measures to change public spending, taxation and the state of the state budget, aimed at ensuring full employment, balance of the balance of payments and economic growth in the production of non-inflationary GDP.

The government can use an expansionary fiscal policy (fiscal expansion) to overcome a cyclical downturn (in the short term) where government spending is expected to increase G, tax cuts T or a combination of these measures.

It can also use a contractionary fiscal policy (fiscal restriction), which limits the cyclical recovery of the economy and involves a reduction in government spending G, tax increase T. In the short term, these measures reduce demand-pull inflation at the cost of rising unemployment and a decline in production. In the longer term, a growing tax wedge can serve as the basis for a decline in aggregate supply and the deployment of a stagflation mechanism. Protracted stagflation against the backdrop of inefficient management of public spending creates the prerequisites for the destruction of economic potential, which is often found in economies in transition, including Russia.

In the short term, fiscal policies are accompanied by multiplier effects on government spending, taxes, and a balanced budget.

Discretionary fiscal policy is a purposeful change in government spending, taxes and the balance of the state budget as a result of special government decisions aimed at changing the level of employment, output, inflation and the state of the balance of payments.

Non-discretionary fiscal policy is an automatic change in these values as a result of cyclical fluctuations in total income. Non-discretionary fiscal policy implies an automatic increase (decrease) in net tax revenues to the state budget during periods of growth (decrease) in GDP, which has a stabilizing effect on the economy.

Net tax revenues are the difference between total tax revenues to the budget and the amount of transfers paid by the government.

Discretionary fiscal policy, in order to stimulate aggregate demand during a recession, deliberately creates a public budget deficit by increasing government spending (for example, to finance programs to create new jobs) or by cutting taxes. Accordingly, during the recovery period, a budget surplus is purposefully created.

Discretionary government policy is associated with significant domestic time lags, as changes in the structure of public spending or tax rates require a long discussion of these measures in Parliament.

With a non-discretionary fiscal policy, the budget deficit and surplus arise automatically, as a result of the built-in stabilizers of the economy.

The results of discretionary policy can also be seen if the influence of the budget balance multiplier is taken into account. It is calculated by the formula:

Discretionary policy is characterized by the deliberate manipulation of taxes and government spending in order to change the size of macroeconomic indicators.

The rapid growth of the internationalization of economic life is accompanied by the accelerated development of international credit. States are increasingly actively using sources of free funds outside their national borders to mobilize the financial resources they need. As a result, external debt arises, which differs significantly from internal debt.

State debt- the total amount of government debt to holders of government securities, equal to the sum of past budget deficits.

Interior public debt - the debt of the state to citizens, firms and institutions of a given country that are holders of securities issued by its government.

External debt - the debt of the state to foreign citizens, firms and institutions.

The rapid growth of international credit is an inevitable result of the internationalization of economic life, cross-country migration of capital, deepening economic interdependence of countries and regions. International credit makes it possible to significantly expand the possibilities of attracting financial resources both to meet the needs of the private sector and to cover state budget deficits. At the same time, the growth of external debt creates very tangible problems. The main one is the growing dependence of the economy of both creditor and debtor countries on external factors that are beyond the control of national funds.