Recently, the US Treasury criticised German economic policy. They argue that German’s export led growth model and anaemic pace of domestic demand is damaging to European and global growth. “Germany’s anaemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe …
Credit policy / financial policy is the use of the financial system to influence aggregate demand (AD). Monetary policy affects AD through the Central bank controlling interest rates and the money supply. Fiscal policy affects AD through the use of government spending and taxation. Credit policy looks at factors such as: Bank lending rates to …
In recent years, I’ve frequently stated that fiscal consolidation can actually increase debt levels. It may seem a paradox because fiscal consolidation aims to reduce the budget deficit by increasing taxes and cutting spending. Yet, under circumstances, policies to reduce debt levels can actually cause a rise in debt to GDP. This seems to be …
In 2012, the EU introduced a new form of its growth and stability pact. The main rules for EU fiscal policy are: Total Government debt must not be more than 60% of gross domestic product; The Government deficit must not be more than 3% of GDP except in particular circumstances. (Source: EU, Current EU rules) …
Fiscal Illusion definition. This is a concept that governments find it easy to raise tax revenues because of consumer ignorance about the way the tax system works. For example, fiscal drag is a way that more taxpayers can end up in a higher tax rate. Public Choice theorist often argues that more needs to be …
The idea that a tax should not distort economic behaviour. For example, income tax may influence the number of hours a worker is willing to work. This is an example of a tax that influences people’s behaviour. On the other hand, a poll tax (a lump sum on each adult per year) is non-distortionary because …
One of the most talked about issues in US politics is the US fiscal cliff. The fiscal cliff refers to the situation at the end of 2012, where a series of tax increases and spending cuts (worth $600bn) are due to come into force automatically. This amounts to This will reduce the budget deficit, but …
Readers Question. Can you explain why the Government and Economic Commentators are talking about a multiplier (in relation to budget cuts) of between 0.5 and 1, whereas I always thought that the GDP multiplier was bigger than this. Just to summarise a multiplier of 0.5 would mean fiscal consolidation (spending cuts) of £1bn, would lead …