Criticisms of Fiscal Policy
Evaluation of Fiscal Policy
- Increasing Taxes to reduce AD may cause disincentives to work. If this occurs there will be a fall in productivity and AS could fall. However higher taxes do not necessarily reduce incentives to work if the income effect dominates.
- Reduced govt spending to Increase AD could adversely effect public services such as public transport and education causing market failure and social inefficiency.
- Fiscal policy will suffer if the govt has poor information. E.g. If the govt believes there is going to be a recession, they will increase AD, however if this forecast was wrong and the economy grew too fast, the govt action would cause inflation.
- Time Lags. If the govt plans to increase spending this can take along time to filter into the economy and it may be too late.
- Expansionary fiscal policy (cutting taxes and increasing G) will cause an increase in the budget deficit which has many adverse effects.
- If the govt uses fiscal policy it will also depend upon the other components of AD, for example if consumer confidence is very low, reducing taxes may not lead to an increase in consumer spending.
- And change in injections may be increased by the multiplier effect, therefore the size of the multiplier will be significant.
- Increased Govt spending (G) to increased AD may cause “Crowding out”
Crowding Out
Crowding out occurs when increased govt spending results in decreasing the size of the private sector.
For example if the govt increase spending it will have to increase taxes or sell bonds and borrow money, both method reduce private consumption or investment. If this occurs AD will not increase or increase only very slowly.
Also Classical economists argue that the govt is more inefficient in spending money than the private sector therefore there will be a decline in economic welfare
- Monetarist Critique. Monetarists argue that in the LR AS is inelastic therefore an increase in AD will only cause inflation to increase.
Related
Fast Delivery By Email!
