Fiscal Policy Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

This example Fiscal Policy Essay is published for educational and informational purposes only. If you need a custom essay or research paper on this topic please use our writing services. EssayEmpire.com offers reliable custom essay writing services that can help you to receive high grades and impress your professors with the quality of each essay or research paper you hand in.

Fiscal policy involves decisions about government revenues, spending, and borrowing. These decisions require politicians to address the reality of limited means and unlimited desires. The politics of fiscal policy is often contentious and is affected by rules that vary across national and subnational governments. Issues may be divided according to the size of government, as measured by spending and taxes (fiscal scale), and the causes and consequences of deficits (fiscal balance).

Size Of Government

Prior to the twentieth century, the fiscal scale of democratic governments tended to be quite limited except during times of war. Nondefense government spending and taxes grew relative to the economy in many countries from about 1910 to 1940, and then again from about 1960 to 1980. Reasons for this expansion likely included demands created by industrialization and urbanization, widespread acceptance of the idea that the provision of social services and free education are basic government functions, and an enhanced ability to monitor economic activity and collect taxes and fees.

Looking across national and subnational governments, current levels of spending and taxes depend on political and institutional variables as well as demand. Liberal parties tend to tax and spend more than conservative parties, but the ability of a party to move fiscal scale to its most preferred level is often dependent on maintaining control for a number of years. Some recent research in political economy has focused on the effects of government structure and electoral rules on fiscal scale. In general, presidential governments chosen in majoritarian electoral systems tend to have smaller fiscal scales than parliamentary governments chosen in proportional representation systems. Additional research has focused on the effects of constitutional or statutory restrictions, such as California’s famous Proposition 13, which limits the amount of property tax revenue available to state and local governments. In the United States, the mere existence of a state constitutional provision that allows citizens to place tax and spending limitations directly on the ballot tends to restrict the fiscal scale of government.

Deficits And Debt

Although voters everywhere tend to prefer lower taxes, they also look to elected politicians to provide various services and programs that cost money. The temptation, therefore, is to finance these services and programs with borrowing that pushes the burden of payment into the future.

Fiscal balance, like fiscal scale, may be affected by the design of institutions. Governments elected in majoritarian systems tend to run smaller deficits relative to the economy. Balanced budget laws and constitutional restrictions on borrowing are fairly common for subnational governments in the United States, but few, if any, national governments have these restrictions.

An alternative source of discipline is credit markets. Governments that run persistent, excessive deficits find that the cost of borrowing goes up and interest payments begin to crowd out spending on services and programs. The possibility of actual default creates substantial risks for lenders and may lead to a request for assistance by the national government to a subnational government or by international sources to a national government.

In recent decades, persistent, significant deficits absent wars or recessions have become an important issue. In the 1930s, governments adopted Keynesian economic principles to combat economic recessions with increased government spending. While this was politically popular, the Keynesian prescription to offset these deficits with increased taxes or decreased spending during times of prosperity was not at all popular. In the 1980s, some conservative governments adopted supply-side economic policies in the belief that the best way to stimulate economic growth is to encourage investment by cutting taxes. Once again, cutting taxes is politically easy, but offsetting spending cuts is hard. Finally, most industrialized democracies have adopted a variety of entitlement programs that provide for income security and health insurance. As life expectancies increase and populations age, the ratios of beneficiaries of these programs to taxpayers increase. The result is that a number of national, as well as some subnational, governments are on unsustainable trajectories. Reform of entitlement programs that benefit middle and upper-middle-class citizens who turn out to vote in elections is a very difficult political task, but one that many governments are likely to find unavoidable.

Bibliography:

Garrett, Elizabeth, Elizabeth A. Graddy, and Howell E. Jackson, eds. Fiscal Challenges: An Interdisciplinary Approach to Budget Policy. New York: Cambridge University Press, 2008.
Heller, Peter S. Who Will Pay? Coping with Aging Societies, Climate Change, and Other Long-term Fiscal Challenges. Washington, D.C.: International Monetary Fund, 2003.
Lowry, Robert C. “Fiscal Policy in the American States.” In Politics in the American States: A Comparative Analysis, 9th ed., edited by Virginia Gray and Russell L. Hanson, 287–315.Washington, D.C.: CQ Press, 2008.
Matsusaka, John G. For the Many or the Few:The Initiative, Public Policy, and American Democracy. Chicago: University of Chicago Press, 2004.
Mueller, Dennis C. Public Choice III. New York: Cambridge University Press, 2003.
Persson,Torsten, and Guido Tabellini. The Economic Effects of Constitutions. Cambridge, Mass.: MIT Press, 2005.
Rodden, Jonathan A., Gunnar S. Eskeland, and Jennie Litvack, eds. Fiscal Decentralization and the Challenge of Hard Budget Constraints. Cambridge, Mass.: MIT Press, 2003.