Fiscal Policy

• Fiscal Policy


  Government need to regulate the economy when it is in contraction/recession phase
• Recession


  The way government manage the economy during expansionary phase will be different with how they do during recession
• Expansion


  Therefore, government need to use their power to collect tax and to spend taxpayer's money depending on current economic situation
• How government manage the economy

  Adjust the government spending, tax revenue and transfer payment to influence the consumption patterns of consumers
• Fiscal policy tools


  Government spending (G), taxes (T) and transfer payments
• GDP = C + I + G + X


  When government use different fiscal policy tools to change C, mathematically, GDP will change too
• Discretionary Fiscal Policy


  The use of fiscal policy tools like government spending (G), taxes (T) and transfer payments to stabilize the economy
• Fiscal Policy Tools


  • Government expenditure to build and produce public capital assets
  • Taxes (SST, income tax, capital gain tax)
  • Transfer Payments (SARA, STR, E-Madani)
• Expansionary Fiscal Policy


  Designed to fight the pressures of recession
• Expansionary Fiscal Policy


  1. Increase government spending on goods and services

  2. Increase transfer payments

  3. Decrease taxes
• Increase government spending


  Increases the production of goods and services, national income, consumption expenditure, and GDP
• Increase transfer payments


  Increases people's disposable income, consumption expenditure, and GDP
• Decrease taxes


  Increases people's disposable income, consumption expenditure, and GDP
• Contractionary Fiscal Policy


  Designed to fight the pressures of demand-pull inflation
• Contractionary Fiscal Policy


  1. Decrease government spending

  2. Decrease transfer payments

  3. Increase taxes
• Decrease government spending


  Decreases the production of goods and services, national income, consumption expenditure, and economic growth
• Decrease transfer payments


  Decreases people's disposable income, consumption expenditure, and economic growth
• Increase taxes


  Decreases people's disposable income, consumption expenditure, and economic growth
• Budget deficit occurs when the government spending is greater than tax revenues for a given fiscal year (G > T)
• Budget surplus occurs when government spending is lower than tax revenues for a given fiscal year (T > G)