Government Spending and Taxation

Introduction 

Government budget is the state of any given nation financially, always given by a combination of the total revenue and the total expenditure that the country it has in a given fiscal year. It also provides determinants to achieving these determinants. They are usually prepared on an annual basis, presented to the legislature by the treasury for debating and verification, before being presented to the President for signing and approval. Countries that have deficits in their budgets always have expenditures that supersede their revenue sources. On the other hand, countries with a budget surplus are those with more revenue than the expenditure available. Therefore, countries with deficits are forced to borrow, leaving such economies with high rates of national debt. 

Government spending and taxation are controlled by the fiscal policies that government uses in the government budgeting. Fiscal policies are useful to the functionality of the government since “it not only determines the size and nature of the welfare state but also affects the distribution of incomes and the performance of the economy" ( Endres,& Fleming ,2002 ).It is through fiscal policies that the government can manage the growth rate of the economy both in the short-term and in the long-term, though the effects of Gross Domestic Product and the economic growth rate which can all be determined by the rate at which the total output of goods and services is rising. 

Economic Analysis 

The level of GDP in a country can be determined by the government, enabling it to keep track of the long term and short-term growth rate of the economy, through changing threat of government spending at taxation (Fourcade, 2009) . During the boom of an economic cycle, the government can increase the rate of spending in the economy, and reduce the tax rates to improve on the GDP level, which results in improved short-term economic growth rate, leading to a stable economy in the long term. However, the process requires some costs and benefits that are because of the use of fiscal policies in the management of these short-term and long-term rates. These costs include time lags, deficits, and the crowding out effect. The benefits, on the other hand, are the stable economy, low levels of income inequality and the increased potential output. 

Costs 

Deficits are the greatest costs that are resultant from the use of fiscal policies in the management of an economy. The government can increase the rate of its spending in direct proportion to the PAE, and reduce the rate of taxation in a way that will give the consumption rate in the economy a boost, a measure that is achieved through expansionary fiscal policies. This process takes place during the recession times for the GDP level to rise, therefore indirectly affecting the rate of short-term economic growth rate by the government. On the other hand, such measures cause the government to incur huge deficits in both the short term and the long term. The causes are however only viable when the government is ready to continue using the expansionary fiscal policies in the management of the long-term economic growth. Huge deficits are however disadvantageous since they are detrimental to the saving rates of the nation, in turn reducing the level of investment in the new capital goods, which is a major contributor to the long-term economic growth ( Endres, & Fleming, 2002) .The problem is not easy to solve. For example, in the case of Ireland, "although Ireland implemented sharp spending cuts and tax hikes amounting to 4.5% of GDP in 2009, the house prices are still collapsing and meant its primary deficit worsened" (The Economist, 2010). 

Time lags are the other effect in the fiscal policy use. Unlike the deficits, time lags are easily fixed by the government, especially in the short term. However, the recovery process for the households and firms will take a while to rectify and readjust their activities due to the changes in the taxation rates. Also, the changes in the economic indicators behaviors only reflect after about a year to a year and a half after they take effect in the economy. 

Also, the use of fiscal policies to solve the problem of recession is difficult since there is a need for the Congress to agree on the specific measures that should be implemented. Therefore, fiscal policies are not flexible enough to be useful in the management of the rate of economic growth. 

Crowding effect is the third cost of the fiscal policy use. Crowding out effect is used to expound on "the increase in interest rates due to rising government borrowing in the money market” (Feenstra, & Alan, 2012). In cases where the government spending is larger than the tax it is receiving, it will be forced to take on loans from different sources such as the World Bank or the RBA. Such a move may lead to an increased demand in need for funds in the economy of the country and therefore exhaust any available savings that result to an increased upward surge in interest rates. The higher the interest rate, the lower the investments by the private sector and the consumption expenditure as well. In such a case, the government debt rates “crowd out” the other companies in the economy and individuals as well from the market, barring their ability to borrow. 

Benefits 

Despite the various costs, there are also benefits that come with the use of fiscal policies in the government spending and taxation. 

The first benefit is the automatic stabilizer that is as a result of neither using fiscal policies in the economic growth rate despite it nor being a flexible factor.” Automatic stabilizers are those elements of fiscal policy that tend to mitigate output fluctuations without any explicit government action” ( Feenstra, & Alan, 2012). The effectiveness of these automatic stabilizers can greatly reduces the extent to which economic shocks affect the country and the added advantage of not being determined by political aspects of the country. For instance, during times of recession, the government spending will rise because of risen unemployment level, rusting in the increased transfer payments. 

The next benefit is the long-term increase in the rate of government output. The investment in the long-term infrastructural projects such as roads, schools, buildings among others will be big on manifesting through the potential output of the country. Also, reduced rates of taxation will raise the incentives people get in working and spending more money. As a result, long-term economic growth will increase. Additionally, the living standards of the people will rise because of such permanent investments. 

The use of fiscal policies to manage an economy’s short-term and long-term rate of growth will be instrumental in reducing the rate of income inequality. The case is large because of fiscal policies aid in the redistribution of income in an economy. Governments always manage to maintain the economic growth by raising the rate of government expenditure through the transfer of payments at a recession. This transfer, such as the unemployment transfers that citizens get, is made directly to those who are poor and disadvantaged, or unemployed, to redistribute some of the wealth from the large investors in the economy. The progressive taxation method is also another way of redistributing the income. Taxes are paid according to one’s income bracket, therefore, the higher the pay, the more tax paid. This ensures that the high-income earners pay taxes that are proportional to their high income, and the low earners pay a tax proportionate to their less income. The tax revenue collected is therefore used in making the transfer payments. 

Conclusion 

Fiscal policies not only help in the management of the long-term and the short-term rate of economic growth rates, but they also create with them externalities in the process. These externalities are those discussed above. Conventional budgeting does not provide a link between the state made investments and the results achieved, which therefore limits the amount of comprehension of the actual returns that are realized from the investments. To rectify the problem, performance-based systems are put in place to differentiate the assets that are created from each set objective, as long as it is measurable, and eventually, such a structure can identify the Perce viability into the ability of the investments made from the budget allocations to giving viable results. 

Static Spending and the budgetary arrangements made on an annual basis give the state of exaggerated targets for these commercial settings. Although, in the case of any deviations, within the financial year, operations can be incapacitated in case they do not require any lengthy procedures for factors behind the incapacitation or the progressions that result from the modifications in the budgetary allocations. To avoid such cases and promote the efficiency, the spending plans made should be revisited every so often for the sake of the projects, to evaluate the benefits and costs incurred which possibly reflect on the financial, hierarchical, as well as other factors ,to evade any surprises. 

References 

Endres, A. & Fleming, G. (2002). International organizations and the analysis of economic policy, 1919-1950 . Cambridge: Cambridge University Press. 

Feenstra, R.C. & Alan, M.T. (2012).” International Macroeconomics”. New York: Worth.p.100-105 

Fourcade, M. (2009). Economists and societies . Princeton: Princeton University Press.