Government and Fiscal Policy
Read this chapter to learn about how the government's fiscal actions influence aggregate demand. The chapter first introduces the components of the government's budget and then discusses discretionary fiscal policy and automatic stabilizers used to influence the economy. Some lags in the implementation of fiscal policy are identified and the concept of crowding out is introduced. Attempt the "Try It" exercises at the end of the section.
1. Government and the Economy
The Government Budget Balance
The government's budget balance is the difference between the government's revenues and its expenditures. A budget surplus occurs if government revenues exceed expenditures. A budget deficit occurs if government expenditures exceed revenues. The minus sign is often omitted when reporting a deficit. If the budget surplus equals zero, we say the government has a balanced budget.
Figure 12.5 "Government Revenue and Expenditure as a Percentage of GDP, 1960–2011" compares federal, state, and local government revenues to expenditures relative to GDP since 1960. The government's budget was generally in surplus in the 1960s, then mostly in deficit since, except for a brief period between 1998 and 2001. Bear in mind that these data are for all levels of government.
Figure 12.5 Government Revenue and Expenditure as a Percentage of GDP, 1960–2011
The government's budget was generally in surplus in the 1960s, then mostly in deficit since, except for a brief period between 1998 and 2001.
The administration of George W. Bush saw a large increase in the federal deficit. In part, this was the result of the government's response to the terrorist attacks in 2001. It also results, however, from large increases in federal spending at all levels together with tax cuts in 2001, 2002, and 2003. The federal deficit grew even larger during the administration of Barack Obama. The increase stemmed from both reduced revenues and increased spending resulting from the recession that began in 2007 and the stimulus.