US Fiscal Policy

US Fiscal Policy

Introduction

Fiscal policy is the use of the government budget to affect an economy. When the government decides on the taxes that it collects, the transfer payments it gives out, or the goods and services that it purchases, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups. A tax cut for families with children, for example, raises the disposable income of such families. Discussions of fiscal policy, however, usually focus on the effect of changes in the government budget on the overall economy, on such macroeconomic variables as Gross Domestic Product (GDP) and unemployment and inflation.

US Fiscal Policy

Historically, the United States government has tended to spend more than it takes in, with national debt that was close to $1 billion at the beginning of the 20th century. The budget for most of the 20th century followed a pattern of deficits during wartime and economic crises, and surpluses during periods of peacetime economic expansion. This pattern broke from fiscal years 1970 to 1997; although the country was nominally at peace during most of this time, the federal budget deficit accelerated, and topping out (in absolute terms) at $290 billion for 1992. In 1998 - 2001, however, gross revenues exceeded expenditures and a surplus resulted. In 1998, the Federal budget reported its first surplus ($69 billion) since 1969. In 1999, the surplus nearly doubled to $125 billion, and then again in 2000 to $236 billion.[1] However, after a combination of the dot-com bubble burst, the September 11 attacks, a dramatic increase in government spending (primarily in defense for military operations in Afghanistan and Iraq) and a $1.35 trillion tax cut, the budget returned to a deficit basis free-falling from a $236 billion surplus in fiscal year 2000 to a $413 billion deficit in fiscal year 2004. In fiscal year 2005, the deficit began to shrink due to a sharp increase in tax revenue. By 2007, the deficit was reduced to $161 billion; less than half of what it was in 2004 and the budget appeared well on its way to balance once again. However, in late 2007 to early 2008, the economy would enter a particularly bad recession as a result of high oil and food prices, and a substantial credit crisis leading to the bankruptcy and eventual federal take over of certain large and well established mortgage providers. In an attempt to fix these economic problems, the United States federal government has passed a series of costly economic stimulus and bailout packages. As a result of this, in fiscal year 2008, the deficit would increase to $455 billion and is projected to continue to increase dramatically for years to come due in part to both the severity of the current recession and the high spending fiscal policy the federal government has adopted to help combat the nation's economic woes.[2] The Congressional Budget Office projects that the federal budget deficit for fiscal year 2009 will spike dramatically ...