Costs and benefits of fiscal policy for economic growth management

¶ … Fiscal Policy to Manage an Economy's Short-term And Longterm Growth

What are the costs and benefits of using fiscal policy to manage an economy's short-term and long-term growth rates?

The fiscal policy is the designated federal tool the government has in influencing the national economy. It can do so for instance by subsidizing domestic production, with the impact of decreased retail prices on internal products, which would be purchased in the detriment of imported items. Aside international trade, fiscal policies can be implemented to regulate a series of other issues, such as the consumption and access to a specific product or the implementation of more taxes to increase the federal budgets. While they do play a major role in the state, fiscal policies should not interfere with the economic sector. The economy should generically be self running and the government should interfere only to resolve problems and regulate specific issues.

Despite this personal belief regarding the inefficiency of fiscal policies in creating long-term economic growth, fact remains that the policy does reveal a series of advantages. These refer primarily to the following:

Fiscal policies decentralize the costs and spread them throughout a wider national palette of individuals reducing as such the strains placed on a single category of tax payers (Auerbach, 1997)

Fiscal policies can increase the access of the population to specific products and services which can be subsidized through federal funds. This can in turn stimulate consumption and economic growth (Country Studies). The most relevant example in this sense is offered by the American economy and its recovery in the aftermath of the World Wars.

In spite of the advantages previously mentioned, the usage of fiscal policies to create economic growth reveals a series of disadvantages, among which the following are of the most importance:

Despite the theoretical advantage of decentralized costs, in practice however, fiscal policies lead to higher levels of cost centralizations and this situation also generates the loss of other advantages (Auerbach, 1997)

While it can generate economic growth through consumption, an economic model based on consumerism is not sustainable. This virtually means that economic growth achieved through fiscal policies is not sustainable on the long-term. At most then, fiscal policies can be used to generate short-term benefits, but they need to be quickly replaced with more sustainable economic strategies.

Fiscal policies are time consuming to implement and they generally create economic blockages. Their adoption can easily be deemed unconstitutional, especially when they are implemented in urgency regimes. The need to remain democratic slows down the creation, adoption and implementation, and these processes are also extremely costly (Michelle, 2006). Especially when they revolve around increasing the federal budgets, the policies are extremely unpopular among the population, revealing even the ability to evolve into social riots.

A relevant example is constituted by the internationalized economic crisis, which has forced several governments to implement austerity programs. Among their main reforms, governments decided to also reduce federal expenditures and increase federal gains. The government of Greece for instance decided to accomplish this goal through a dual strategy:

On the one hand, it implemented a fiscal policy to reduce the federal expenditures by decreasing the salaries of the state employees. They also decreased the state aids for a vast category of individuals, such as unemployed or women on maternity leave.

On the other hand, they increased taxes by imposing new duties on revenues and other gains (O'Grady, 2010). This second decision meant that the category of people working for the state or otherwise depending on it would be hit twice -- first through the reduction of their income, and secondly through the increasing costs of life -- the immediate and unavoidable impact of the second policy.

At a general level, the fiscal policy decreased the individuals' purchasing powers, which subsequently translated into lower levels of consumption. In other words, people bought commodities at higher prices, but they lowered their purchase volumes. The government will probably end up with the same level of federal revenues, but their collection structure will suffer modifications. In other words, the same amount of taxes was once collected through lower taxes and higher purchases, whereas now, the same amount of revenues is collected through higher taxes, but lowered purchase volumes.

The second part of the fiscal policy materialized in even more devastating impacts. The first impact was felt by the economic agents who first registered decreasing sales of their products and services. Secondly, they suffered as they were forced to pay higher taxes and contributions to the state budgets. Their organizational revenues were as such subjected to a dual hit. The result was that of more and more common downsizing processes and the increase in the number of economic agents filing for bankruptcies. The socio-economic effect of unemployment did not tardy. Instead of resolving the economic problems of the country, the fiscal policy only deepened them.

Fiscal policies are levers to be used rarely and with specific objectives. The main element to be considered in the use of fiscal policies is the future stability of the country and its complete and complex apparatus. Economic growth is an important goal for any state, but stable and sustainable growth is more important. Fiscal policies should only be used in isolated incidents and when they can generate benefits for the populations. A laudable fiscal policy refers to the increase in taxation of the tobacco and alcohol products. This materializes in restrictions for the populations through reduced access and as such improved health.

Economic growth however should not be tempered with through fiscal policies. It should be naturally and economically efficiently achieved. Additionally, as history has shown, long-term economic stability cannot be achieved through governmental intervention, but it can only be achieved based on its own economic principles. This is the sole means in which a country's economic state is stable and sustainable.