Sunday 18th March, 2007


Fiscal policy tosses hard workers

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Central Bank reported that the Government posted a surplus of some $7.7 billion during the first nine months of the last fiscal year. But what is fiscal balance and fiscal policy in general?

First of all, the word fiscal here broadly refers to the revenues, debt and spending of the Government. Fiscal balance is a measure of government’s tax revenues, plus any proceeds from sale of assets, minus government spending. When the balance is positive, government is deemed to have a surplus.

Fiscal policy refers to the decisions of the Government with respect to how it will spend its revenues and how it will tax its citizens. The long view is to ensure that resources are strategically and optimally utilised to generate useful output—goods and services, so that economic stability can be realised.

The concept of fiscal policy has its origins in the work of 20th century English economist, John Maynard Keynes. His theory was that unemployment is caused when there is an insufficient demand for goods and services. When there is great demand, unemployment falls and when there is excessive demand, inflation results.

When governments intervene in the cycle, it is usually to create either a surplus or a deficit in order to stimulate certain economic goals. When they increase purchasing or spending and cut taxes, for example, more disposable income is put in the hands of the workers and greater demand is triggered. This is sometimes referred to as pump priming.

Low income earners

When there is too much expansion, governments will reverse the process by constricting its own spending, and increasing taxes. These are seen as deliberate fiscal measures. The dilemma is centred on the extent to which it should intervene in the normal business cycle.

The funny thing about fiscal policy is that it doesn’t affect everyone in the same way. For example, when taxes are cut, the largest working group—the middle class—is most affected. Some individuals, who don’t pay taxes anyway, for example, low income earners, would experience no benefit.

Conversely, when tax rates increase, those most affected are also the middle class, since they pay more taxes, while the wealthy do not suffer adversely. The irony is those who work the hardest, tend to be the ones tossed around by fiscal policy.

The opposite of fiscal policy is the old term laissez-faire. The French expression meaning to leave it alone, sometimes called “let-it-be economics, purports that governments should never intervene in the business cycle. Additionally, advocates of laissez-faire do not support minimum wage legislation or trade restrictions.

There is another strategy used by governments in tandem with fiscal policy, called monetary policy. This deals with how the money supply grows. A country’s money supply refers to the total stock of bills, coins, credit and liquid instruments in use.

Our strong fiscal balance experience was attributed to the revenues from the oil and gas sector. The fiscal policy allowed for a reduced need for tax revenue. That large group in the middle have an opportunity to save.

But it is cyclic, so use it or lose it!

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