Pros and Cons of Fiscal Policy

The article by Nevile and Kriesler (2016) highlights the drawbacks of fiscal policy on the economy. The authors argue that an increase in government spending, meant to boost economic activity, tends to take longer before its impact filters into the entire economy. The authors reiterate that the delay is a direct result of the lags in implementing the changes in spending patterns of the economy. Moreover, the article demonstrates that tax cuts and an increase in government spending also increase the budget deficit, resulting in adverse effects in the future, including an increase in taxes, which eventually causes crowding out. The article concludes that tax cuts may not lead to increased consumer spending if consumer confidence is low. Lack of increased consumer spending, therefore, results in increased saving, making the fiscal policy less effective in the long run.

The article by Bova, Medas, and Poghosyan (2018), highlights the benefits of fiscal in increasing economic activity. First, it explores the use of tax cuts as an indirect injection into the circular flow by increasing consumers’ disposable income. Second, it covers the increase in government spending as a critical component that influences economic performance. Bova et al. (2018) posit that tax cuts increase disposable income for both businesses and individuals and therefore helps boost economic activity through increased spending in the economy. 

The use of expansionary fiscal policy can improve American citizens’ conditions through tax cuts in personal income to raise disposable income, which is a crucial determinant of consumption and investment. Tax cuts help keep more money in circulation, which improves the economy by boosting overall spending in the economy. As a result, the consumption levels of American citizens will increase. The cost of using expansionary fiscal policy is the upsurge in government borrowing to finance its projects, which will result in higher debt interest payments.

Bova, E., Medas, P., & Poghosyan, T. (2018). Macroeconomic stability in resource-rich countries: The role of fiscal policy. Journal of Banking and Financial Economics, 1 (9), 103-122.

Nevile, J. W., & Kriesler, P. (2016). Tools of choice for fighting recessions. Post-Keynesian Essays from Down Under Volume II: Essays on Policy and Applied Economics, 1-17. Retrieved from https://link.springer.com/chapter/10.1057/9781137475350_2#citeas