Macroeconomic policies in a global context

• Measures to reduce fiscal deficits & national debts:

  • Austerity policies = contractionary policy by reducing government spending and increasing tax rates (government revenue)
  • Issuing bonds = raising revenue by borrowing from the public
  • QE
• Austerity policies may not be effective in reducing national + fiscal debts as higher taxes reduces disposable income and makes it harder for households by decreasing public services - it reduces economic growth
• Measures to reduce poverty and inequality =

  • Progressive tax systems in which the government can redistribute the wealth
  • Wage legislations (minimum wage) + increased inheritance tax
  • Increasing human capital with free education + healthcare
• Progressive taxes may not effectively reduce inequality and poverty as it puts an increased burden on high income earners and therefore disincentivises people from working harder
• Progressive taxes may not effectively reduces inequality and poverty as it it may run up to the point in the Laffer curve where high earners may tax avoid or stop working and therefore tax revenue decreases
• Free education may not decrease inequality and poverty as people still may not use it due to attitudes towards education
• 3 problems facing policy makers = Inaccurate/imperfect information, risks and uncertainties and inability to control external shocks