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Module 16: The National Budget - Fiscal Policy

While the Federal Reserve manages the money supply, the US Government (Congress and the President) manages the money flow. This is Fiscal Policy . It dictates taxation and public spending to steer the nation toward prosperity .

1. The Two Levers of Fiscal Policy

  • I. Taxation (The Income): * Direct Taxes: Corporate taxes, capital gains taxes, and personal income tax.
    • Indirect Taxes: Sales taxes and excise duties.
  • II. Public Expenditure (The Spending): * Revenue Expenditure: Day-to-day operations, government salaries, Medicare, and Social Security.
    • Capital Expenditure (Capex): Long-term investments in infrastructure like the Interstate Highway System, power grids, and defense technology. Capex is the engine of future national growth .

2. The Fiscal Stance

  • Expansionary Policy: Implemented during a recession. The government lowers taxes (leaving more disposable income for citizens) or passes massive spending bills (creating government contracts and jobs) .
  • Contractionary Policy: Used rarely to cool inflation or reduce debt. The government raises taxes or cuts federal spending, pulling money out of the private sector .

3. Monetary vs. Fiscal Policy

You must understand the distinct jurisdictions of these powers:

  • Controlled By: Monetary is the Fed; Fiscal is Congress/Treasury.
  • Main Tools: Monetary uses Interest Rates; Fiscal uses Taxes and Spending.
  • Speed of Execution: The Fed can change interest rates in an afternoon emergency meeting. Fiscal policy requires a bill to pass through the House, the Senate, and the President, which can take months of political gridlock.

Case Study: The Infrastructure Investment and Jobs Act

In 2021, the US government passed a massive $1.2 trillion bipartisan infrastructure bill.

  • Analysis: This was an aggressive use of Fiscal Policy focused on Capital Expenditure (Capex). By injecting capital into broadband, bridges, and green energy, the government directly stimulated aggregate demand while attempting to improve the long-term productivity of the US economy.

Self-Assessment Quiz

  1. Why is Capital Expenditure (Capex) generally viewed more favorably by economists than Revenue Expenditure?
  2. If Congress passes a massive tax cut for corporations, is this an example of Expansionary or Contractionary Fiscal Policy?