Discretionary Fiscal Policy

Discretionary Fiscal is the government policy to change the tax and spending policy to influence the aggregate demand. The government will reduce taxes to increase the demand. When tax decrease, it will increase the people’s disposable income which encourages them to spend more on the market. The business will have more profit as well, so they will increase more investment, hire more people. As a result, people will have more income from their job and they will have more spending. Vice versa, increasing tax will decrease the aggregate demand in the market.

Moreover, government spending has a huge impact on the aggregate demand in the market. When the government increases spending on infrastructure, it would lead to a long-term increase in productivity and growth in local demand. The farmers can transport their output to the market and increase their income. If the government increase spending on welfare, it will reduce the inequality income, more people will have more income, so they will increase their spending.

Advantages of Discretionary Fiscal Policy

  • Reduce unemployment rate: Fiscal policy play an important role in reducing unemployment during the economic recession. The government may reduce taxes and increase their spending to boost the economy.
  • Increase economic growth: The government can reduce the tax rates to increase productivity and increase export. The local company will increase production when they get tax incentives from the government.

Disadvantage in Discretionary Fiscal Policy

  • Time: There is a huge time difference between the implement and the effect, time spent is very long. When the government invests in infrastructure, it will take years to see the growth in aggregate spending.
  • Not practical to decrease demand: The concept of discretionary fiscal, we can use the policy to increase or decrease demand. However, we hardly see the government use this policy to decrease the aggregate demand.
  • Hard to decrease spending: It is very hard to cut government spending without a proper plan in advance. It requires long-term preparation, hard to use in an urgent situation.