Time Lags in Discretionary Fiscal Policy
Fiscal policy is primarily made at the federal level with the help of the acts of Congress and deeds by the President. This fiscal policy is also used by state and local administrators to make the political economy steady. So, it can be said that the objective of fiscal policy is to alleviate the business cycle, to make decisions related to the extension and slimming down of the company (Macroeconomic Theory, 2008). Discretionary Fiscal Policy can be defined as a policy where the administration (government) purposely amends the taxes or the expenditure incurred by them. This is done purposely to change the level of cumulative demand. There are a lot of dilemmas associated with the discretionary fiscal policy, especially in forecasting the degree of the effect of discretionary fiscal policy. This unrestricted policy involves erratic time wraps, which can make the guiding principles destabilize. Thus, the government would take the action accordingly. At times, the Congress and the President can also ignore the contrary outcomes of the policies in the long run which are contrived for the success of the political actors in the short-run. The application of fiscal policy confronts time lags and policy lags between the onsets of a fiscal problem. Various economic problems, which arise because of this time lag or policy lag, can lead to the contraction of the business-cycle. Also, it can have a negative impact of the policy intended to correct the problem. There are various factors which can complicate fiscal policy like time lags, political problems and prospects and state or local funds.
In the unrestricted economic policy, time lag can occur in 5 ways:
- Time interval prior to identifying the problem;
- Lag between identifying the problem and the action to be taken;
- Between the declaration of the solution and its execution;
- lag whilst the multiplier and accelerator work themselves out;
- The pause before expenditure completely reacts to new situations related to fiscal conditions.
The alterations in the spending of the government on various commodities and services will have a complete multiplier outcome. And the changes in tariffs and reimbursements will have a less multiplier effect. The administrators can decrease the taxes so that the cumulative demand curve shifts towards right. For instance, if the government reduces the taxes on personal income, the disposable income will be augmented by the same amount. Also, an increase in the consumption rate can be noticed. This will also boost the savings (Fiscal Policy, 2008)
If the government reduces the tax, there will be a comparative increase in the economy rather than on expenditure. To boost the expenditure primarily by a certain amount, there is a need for Congress and the President to diminish the taxes by a large amount. Hence, the time wraps will have an unfavorable influence. To maintain a healthy economy, the time lags play a negative role and adversely affect the exertions of the Congress and President.
To destabilize the economy, the administrators should mingle the increase in expenditure and the reduction in taxes in such a way that initially it generates the desired increase in expenditure. This will finally enhance the cumulative demand and also the factual gross domestic product (GDP). For instance, the Congress and the President can diminish the taxes which will increase the expenditure affecting the economy. The administrators decrease the taxes to stimulate consumption spending; in the same way, they can also boost the tax to decrease the expenditure on consumption.
To conclude, the discretionary policy is similar to a two-edged rapier, which can be helpful as well as harmful. It will diminish the economic instability, if used at the right time, but can also increase it, if used at a wrong time.
Fiscal Policy. (2008). Retrieved August 19, 2008, from http://www.scribd.com/doc/405721/Economics-Chapter12
Macroeconomic Theory. (2008). Retrieved August 19, 2008, from http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=fiscal+policy