Expansionary Discrectionary fiscal policy

Readers Question I would like to know the full explanation of Expansionary Discrectionary fiscal policy and its effects on the economy. Thank you regards John

Fiscal Policy is changing the governments budget to influence aggregate demand. i.e. changing taxes and spending

Expansionary fiscal policy is cutting taxes and / or increasing government spending. Lower taxes (e.g. lower VAT in the case of the UK) increases disposable income and in theory should encourage people to spend.

Discretionary fiscal policy is when the government makes changes to tax rates. This is opposed to automatic fiscal stabilisers where in a recession government automatically spends more because there are more claiming unemployment benefits.

Is Fiscal Policy Working?

In theory expansionary fiscal policy should increase AD and economic growth. But, in practise this can take a long time.

The UK is experiencing a very big credit boom and bust. Therefore, tax cuts have been ineffective to encourage spending – people are concentrating on paying off their debts.

Tax cuts are also being outweighed by falling house prices which is causing a big negative effect on consumer spending.

For more detail see:

• Does fiscal policy reduce unemployment?
• Impact of expansionary fiscal policy