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101 Concepts for the Level I Exam

Concept 33: Fiscal Policy Tools


Fiscal policy tools include::

Spending tools:

  • Current expenditure: On-going spending on goods and services by government. For e.g. salaries of government personnel, national defense expenditure etc.
  • Transfer payments: Primarily aimed at redistributing wealth. For e.g. unemployment insurance benefits, social security etc.
  • Capital expenditure: Government spending on infrastructure projects to boost economic productivity. For e.g. bridges, road networks etc.

Revenue tools:

  • Direct taxes: Taxes levied on wealth and income. Includes income taxes, corporate taxes, wealth taxes capital gains taxes etc.
  • Indirect taxes: Taxes levied on goods and services. Includes sales taxes, value-added taxes, excise taxes etc.

 

Advantages and disadvantages of fiscal policy

Advantages:

  • Indirect taxes can be implemented swiftly and start generating revenue for the government immediately without incurring additional costs.
  • Indirect taxes like VAT can influence spending behavior instantly and can be used to discourage consumption of sin products like alcohol and tobacco.

Disadvantages:

  • Implementation of changes in direct taxes and transfer payments policies is time consuming, thereby delaying the impact of the fiscal policy.
  • Capital expenditure projects like road construction have long gestation periods; delaying the impact of the fiscal policy.