DOWNLOAD MIỄN PHÍ TÀI LIỆU https://s.pro.vn/Z3UW Government spending and fiscal policy

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Table of Contents
1. Introduction.................................................................................................................1
2. Government spending and fiscal policy....................................................................1
2.1. Overview of Government spending and fiscal policy...........................................1
2.2. The effects of Government spending and fiscal policy........................................3
3. Conclusion .................................................................Error! Bookmark not defined.
4. Reference ...................................................................Error! Bookmark not defined.

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1. Introduction
Fiscal policy is one of the elements of the important policy system in regulating
the macro economy (Cottier, Lastra, Tietje and Satragno, 2014). In particular,
fiscal policy includes the government activities impacting on the development of
the economy through changes in government spending and taxation. Fiscal policy
is different from the basic economic policies such as monetary policy. It is a
policy that is responsible for stabilizing the economy by controlling interest rates
and money supply. The two main tools of fiscal policy are government spending
and taxation (Jain & Khanna, 2007). The changes in the level and composition of
taxation and government spending may affect the economic variables, such as
aggregate demand and the level of economic activity; type of resource allocation;
distribution of income. In other words, fiscal policy relates to the overall impact of
the government budget for economic activities. Therefore, we can see that,
government spending and fiscal policy affect directly the economy, and especially,
the infrastructure of a country.
2. Government spending and fiscal policy
2.1. Overview of Government spending and fiscal policy
According to Dwivedi (2005), Government spending or public investment is
expenditures of the government to provide public goods and services, such as the
cost for development of roads, schools, military, wages of public servants, etc…
Government spending is an important component of aggregate demand. Keynesian
economics confirms that public investment can promote aggregate demand
through the fiscal multiplier. Based on that, the authors enhance the role of fiscal
policy (Keynes, 1936).
Having the same opinion, Müller, Meier, and Corsetti (2012) state that
Government spending includes many items with different functions such as public
spending of the government on the provision of non-market goods and services;
the expenditure for the production of government in the provision of market goods

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and services (when the state-owned enterprises are directly involved in the
production and trading of goods on the market); and the investment expenditures
reflecting public investment in capital formation for long-term benefits, such as
infrastructure, roads, schools, hospitals,... In essence, government spending for the
provision of non-market goods and services are free provision or at prices that are
much lower than the cost of production. The free basic services provided by the
government to society can be listed as national security, law enforcement, public
health, primary education, basic scientific research, infrastructure, or market
support services. The value of non-market goods and services provided by the
government are calculated by the spending method which the government must
spend money or tax revenue on producing and delivering these goods and services
for the people (Brixi & Swift, 2004).
Regarding fiscal policy, it is often associated with Keynes’ (1936) school. The
author’s main studies published in his book affect the new ideas about the
interpretation of how the economy works. And this issue has been studied until
now. Most of Keynes’ (1936) theory is developed during the Great Depression. In
fact, they are used as many times, because it is quite common and specific
application to reduce the impact of the recession. In general, economic theory
based on Keynes’ ideas asserts that the initiative of the government is the unique
way to steer the economy. This implies that the government should use its powers
to increase aggregate demand by increasing spending and creating an easy
environment for monetary circulation, thereby stimulating the economy, creating
jobs, and finally, increasing the wealth in society. And then, fiscal policy has been
applied successfully even during and after the Great Depression, but the theory of
Keynes was skeptical in the 80s (Eatwell & Milgate, 2011).
According to Yamauchi (2004), fiscal policy in macro-economics is a policy
influencing the economy through tax regime and public investment. Fiscal policy
and monetary policy is the important macroeconomic policies for the stability and

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development of the economy. This policy is implemented though “fiscal
instruments” or “fiscal handles”, “fiscal tools” and “fiscal levers” (Dwivedi,
2005, p. 546). According to the author, the fiscal instruments include budgetary
balance policy, government expenditure, taxation, and public borrowings.
Besides, these instruments have close relationship. The government can use one or
more tools in fiscal policy to guide the economy for the specified purposes.
Besides, according to Jain & Khanna (2007, p. 160), fiscal policy has strong effect
the economic activities and is defined as “the policy related to revenue and,
expenditure of the government for achieving a set of definite objectives”. And the
author also refers to the objective of fiscal policy. There are four main objectives:
full employment, price stability, reduction in economic inequality, and economic
development (Jain & Khanna, 2007). These are also general objectives of each
government in regulating the economy.
Obviously, fiscal policy is the use of government spending and tax revenues to
impact on the economy of the Government. The combination and interaction
between government spending and tax revenue is a balance, but fragile. So it’s
necessary to reach precise timing and a little luck to gain the effects in these
activities. According to Pisciotta (1985), the direct and indirect impact of fiscal
policy can affect personal spending, business investment, exchange rates, budget
deficits, and even interest rates which are often considered to be related to
monetary policy. Because of large impact of fiscal policy, the application of this
policy on time is very necessary and important. Therefore, the government should
apply appropriately this policy in regulating the economy.
2.2. The effects of Government spending and fiscal policy
In theory, there are three main points related to the effect of government spending
to economic growth (Organization for Economic Co-operation and Development,
OECD, 2004). The first version believes that government spending has a positive
impact, and promote economic growth through the implementation of the law or

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the provision of public goods and services,… (Müller, Meier, and Corsetti, 2012).
Accordingly, government spending can create economic - social stability and
favorable conditions for economic growth. Besides, the programs of government
spending providing valuable public goods, such as defense, technology,
communications, infrastructure, health, education, and commodities which are the
fundamental decisions of economic growth have positive externalities and useful
support of the economic growth (Müller, Meier, and Corsetti, 2012).