Limitations of Fiscal Policy
1) Lags
- recognition lag: the time before the problem is recognized
- decision lag: takes time to decide what to do; time between recognition and making the decision to act( but here the automatic fiscal policy kicks in)
- implementation lag: time between decision to act and implementation; decide who does what
- impact lag (effect lag): time between implementation and when the economy feels the effect
(there is a risk with fiscal policy, because it takes such a long time, the economic problem would have fixed itself before its implemented and they can create more problem)
2) Varying government spending and taxes
- difficult to get politicians to cut spending or raise taxes
- the effects that raising taxes or cutting spending has on the economy
3) Relationship between different levels of government
- federal, provincial and municipal governments are all entitiled to implement their own fiscal policy, and they could cancel each other out
- all can have difference of opinions and move in defferent directions
4) Relationship between expansionary fiscal policy and national debt
- lower taxes (due to tax cuts and less income in households) causes a country to use deficit spending during a recession which continually adds to national debt(i)
*All info taken from lecture notes "Fiscal Policy," slide 17.*
(i) Stephanie Powers, Fiscal Policy lecture notes, slide 17, April 2012
1) Lags
- recognition lag: the time before the problem is recognized
- decision lag: takes time to decide what to do; time between recognition and making the decision to act( but here the automatic fiscal policy kicks in)
- implementation lag: time between decision to act and implementation; decide who does what
- impact lag (effect lag): time between implementation and when the economy feels the effect
(there is a risk with fiscal policy, because it takes such a long time, the economic problem would have fixed itself before its implemented and they can create more problem)
2) Varying government spending and taxes
- difficult to get politicians to cut spending or raise taxes
- the effects that raising taxes or cutting spending has on the economy
3) Relationship between different levels of government
- federal, provincial and municipal governments are all entitiled to implement their own fiscal policy, and they could cancel each other out
- all can have difference of opinions and move in defferent directions
4) Relationship between expansionary fiscal policy and national debt
- lower taxes (due to tax cuts and less income in households) causes a country to use deficit spending during a recession which continually adds to national debt(i)
*All info taken from lecture notes "Fiscal Policy," slide 17.*
(i) Stephanie Powers, Fiscal Policy lecture notes, slide 17, April 2012