Summary
The article name of the article is “Is Discretionary Fiscal Policy Effective? The Caribbean Experience” and the author is Prosper F. Bangwayo-Skeete. The work has been published by The Journal of Applied Economic Sciences. For the last few years, countries across the world have faced immense economic crises. In reacting to these problems, governments have responded by developing fiscal policies to cushion the adverse economic effects (Bangwayo-Skeete, 2014). The author argues that appreciating the importance of fiscal policy allows policymakers to determine their spending decisions. In contextualizing his discussion, the author pays significant attention to three Caribbean countries, Jamaica, Barbados, and Trinidad and Tobago (Bangwayo-Skeete, 2014). According to the author, the government spending policies can positively affect some countries and adverse implications on others, depending on the specific underlying factors.
The article pays significant attention to the impact of fiscal policy on the Caribbean region's economic activity between 1980 and 2009. During a recession, many countries resort to a Keynesian policy characterized by expansionary fiscal policies, including tax cuts (Bangwayo-Skeete, 2014). The primary objective of such policies is to trigger consumption and increase government expenditure. However, using empirical research, the author establishes that these policies are not universal in triggering economic benefits. The analysis demonstrates that the neo-Keynesian policy works effectively for Jamaica and Trinidad. However, the same policies have negative implications for Barbados (Bangwayo-Skeete, 2014). Overall, the slow response, in general, raises fundamental questions on the value of the discretionary fiscal policy in stabilizing the economy of a country. Although the author identifies the differential impact of the fiscal policies on the Caribbean countries, he does not particularly provide valid reasons to back his assertions. More importantly, he fails to provide global implications outside the Caribbean region.
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My thesis for the article is: The effectiveness of government fiscal policies in recovering an economy from a recession depends on the country's economic characteristics before the crisis.
Analysis
The central question in this discussion regards the effectiveness of the discretionary fiscal policy. Governments respond to economic shocks in many different ways. The discretionary fiscal policy allows the government to change spending and tax dynamics within a country. The policy can either shrink or expand the economy according to government requirements. For instance, in 2009, the United Kingdom government initiated cuts of the value-added tax (VAT) intended to spark an economic boost (Beetsma, 2008). The discretionary fiscal policy's ultimate objective is to improve aggregate demand (AD) and the resultant output. The 2008 and 2009 recession created a global economic crisis that adversely affected many nations. The Caribbean was among the world's most affected regions (Fazzari, Morley, & Panovska, 2020). Many countries across the world initiated discretionary financial policies with differential outcomes. As illustrated by Bangwayo-Skeete 2014, manipulating government spending stimulated the economy of Jamaica and Trinidad and Tobago. However, the same case was not witnessed in Barbados.
Cutting government spending as fiscal policy has several implications on the economy of a country. The impact of government spending depends on the areas of focus. Some of the common places the government directs its money include welfare payments, pensions, capital expenditure, or government departments (Attinasi & Klemm, 2016). A reduction in government reduces public debt and ensures that money is redirected to other areas of the economy that are performing dismally. Furthermore, reduced government spending frees resources for use in the private sector (Fazzari, Morley, & Panovska, 2020). The overall impact is an improvement in consumer wealth. Am increased government spending can harm the economy in the long-term. More so, haphazard spending during the recession is unsustainable as it risks putting the government into more debts. However, as seen in Barbados' case, cutting government expenses does not necessarily result in benefits. In general, discretionary fiscal policies are associated with many problems (Bangwayo-Skeete, 2014). The policies have the most negative effect when the government initiates tax cuts. Tax collection forms a fundamental part of the government’s revenue (Carnot & De Castro, 2015). Reducing the government revenue could harm development projects hence reducing the levels of employment.
Tax cuts have an ambivalent impact on the stability of an economy. On the positive side, it allows private corporations to operate in a favorable business environment. During an economic recession, the private sector suffers significant financial problems, resulting in unemployment and losses on the part of the business. Taxes form a critical part of organizational expenditures (DeLong, Tyson, and Cottarelli et al., 2013). Therefore, reducing these taxes increases the opportunity of the business to perform and increase its revenue. The short-term impact is increased profit margins and the ability to sustain the wage bill of the employees. Discretionary fiscal policies, such as tax cuts, are vital to the private sector's existence and performance (Auerbach, 2002). However, in the long run, the country will experience the negative effects of the tax cuts. The government will be compelled to look for additional revenue sources, such as acquiring debts that have a long-term implication on the sustainability of a country.
Also, a close relationship exists between government spending and aggregate demand. Conventionally, an increase in the spending of a government shifts the demand curve to the right. A reduction in government spending can have differential effects, as witnessed in the Caribbean case study. In Barbados, a reduction in government spending affecting the economy's vital areas resulted in massive unemployment (Auerbach, 2002). Also, a reduction in the government's spending curtails growth and increases the burden on the private sector. The public sector forms a significant part of the economy. A reduction in government spending, for instance, in wages means that the aggregate demands lower relative to the supply. The people's purchasing power drastically diminishes due to the reduced wages and salaries (DeLong, Tyson, and Cottarelli et al., 2013). The overall impact is a weakened economy, with more people suffering due to unemployment and reduced wages. For the citizens, cutting the taxes increases the disposable income hence triggering aggregate demand (Carnot & De Castro, 2015). Such a situation will increase consumption and allow the economy to thrive due to the high purchasing power.
Conclusion
The effectiveness of government fiscal policies in recovering an economy from a recession depends on the country's economic characteristics before the crisis. As illustrated in the Caribbean countries, the discretionary policies do not have a universal impact on an economy, as illustrated in the various countries in the case. Particular attention is placed on reducing government spending and initiating tax cuts. Based on the analysis, these policies can have either positive or negative effects. Reducing government expenditure can trim resources and limit expenditure in the public area leading to unemployment. However, it can also reduce the country's debt burden and allow for the redirection of resources to areas of urgent need. Tax cuts can increase aggregate demand by allowing individuals to keep the more disposable income. However, the policy can harm the revenue of a country in the long term.
Countries should balance government expenditure and tax cuts during a recession. Fiscal policies must reflect the underlying economic structure and conditions of a country. Tax cuts should be implemented in the short-term to trigger demand. Once the demand increases, tax policies should be restored to default to avoid further damage to the revenue collection. The government should also pay attention to its spending behavior. The increase or the decrease should occur within a narrow margin to avoid significant effects on the economy on either end.
References
Attinasi, M. G., & Klemm, A. (2016). The growth impact of discretionary fiscal policy measures. Journal of Macroeconomics , 49 , 265-279.
Auerbach, A. (2002). Is there a role for discretionary fiscal policy? (No. w9306). National Bureau of Economic Research.
Bangwayo-Skeete, P. F. (2014). Is Discretionary Fiscal Policy Effective? The Caribbean Experience. Journal of Applied Economic Sciences , 181.
Beetsma, R. M. (2008). A survey of the effects of discretionary fiscal policy . Swedish Fiscal Policy Council (Finanspolitiska rådet).
Carnot, N., & De Castro, F. (2015). The discretionary fiscal effort: an assessment of fiscal policy and its output effect. Hacienda Pública Española , (215), 63.
DeLong, J. B., Tyson, L. D., Cottarelli, C., Gagnon, J., Gorodnichenko, Y., Reinhart, C. ... & Summers, L. (2013). Discretionary Fiscal Policy as a Stabilization Policy Tool: What Do We Think Now That We Did Not Think in 2007?
Fazzari, S. M., Morley, J., & Panovska, I. (2020). When Is Discretionary Fiscal Policy Effective?. Available at SSRN 2921667 .
