Discretionary fiscal policy

Changing taxes and expenses, the state pursues a fiscal policy. It is aimed at regulating the level of activity in the economy and managing aggregate demand. If these same measures are connected with the legislative, the state conducts a discretionary fiscal policy. The government, as a rule, informs about its carrying out officially. Discretionary fiscal policy is accompanied by changes in tax rates, transfer payments, the size of government purchases. A sufficient reason for this move may be fluctuations in investment. As part of the total costs - this is the most volatile part of them, which destabilizes the situation as a whole. Changes in investment entail changes in employment, in the volume of production. By reducing or increasing taxes and expenses, the government is trying to counteract this effect. Such a tool used in due time the government of T. Roosevelt in America.

It is known that tax cuts do not have such a strong impact as an increase in spending. It happens because the income of consumers grows, but they are not used completely. Some of them are preserved, since the maximum propensity to spend does not reach unity. This phenomenon is known as the multiplier of a balanced budget. Simple calculations make it possible to see that it is equal to 1. And this means that the increase in production and income corresponds to the growth of state expenditures. This pattern can be used by the government. When it wants to stop inflation, it is enough to reduce the state's expenses and raise taxes or do the opposite, if it is necessary to expand the economy. It seems that it is very easy to do this. But in practice, discretionary fiscal policy has some difficulties in use. This is a problem of volume and time. The first includes the amount of regulation by the state and what force will be the possible effect. The second problem is that it is impossible to predict how long the temporary lags will last.

World practice shows that discretionary fiscal policy is often carried out on the basis of not very accurate statistics, as a result of which a destabilizing effect occurs instead of a stabilizing effect.

In order to somehow improve the current economic situation in the country, the following instruments of fiscal policy are used:

1. Change of those programs which are connected with expenses. In the period of depression that has engulfed the country, the government first of all starts with the implementation of those public investment projects that are aimed at overcoming unemployment. Often they are inefficient, as they are compiled in a hurry, ill-conceived, just to ensure the employment of the population faster.
2. Changing programs of embezzlement redistributive type. The growth of transfers raises aggregate demand. This is the case, because the increase in social payments raises and increases the income of households. If other conditions are the same, then the costs of consumers are also growing. Also, increases in subsidies allow firms to expand production. Reduction of transfer payments, on the contrary, leads to a drop in aggregate demand.
3. Periodic fluctuations in the level of taxes. This tool acts in a different direction. Tax increases lead to a reduction in investment costs and consumer spending. Consequently, aggregate demand also falls. And, accordingly, the reduction in taxes leads to its growth and to the growth of real GNP.

In special situations, for example, in conditions when the country is experiencing an economic crisis, the state implements a stimulating fiscal policy. In this case, the government should support the supply and aggregate demand (or at least one of these parameters). To this end, the state increases the volume of purchased services and goods, taxes are reduced, and transfers are increased, as far as possible. Even the smallest of these changes will lead to the fact that the cumulative output will increase, which means that the aggregate demand will also increase automatically. To this result results the application of stimulating fiscal policy in most cases.