Hi! I’m Jessica Bruno with Advisor.ca, and today we’re going to talk about fiscal policy.
When not enough people are working or production is too low, the government uses fiscal policy to push the economy back to its potential.
Fiscal policy also funds society’s goals, such as giving us education or health care. It can do this in three ways: through borrowing money, taxing us, and spending what it collects.
It works like this: say a government wants to build a road.
The road-building project employs 1,000 people.
If they didn’t have jobs before, they now have money to spend. Some can now buy new clothes or go out for dinner. That prompts the local mall to hire.
And what about those construction firms and material suppliers? They’re busier too. The road helps their businesses and in turn the economy.
But it’s not always good for the government to spend. If it spends more than it collects in taxes, then it has a deficit and it has to borrow. A deficit is then added to a country’s debt.
Just like you and I, the government has to pay back the money it borrows.
There are two ways of looking at government spending: “hawkish” and “dovish.”
Deficit hawks argue that private companies should sustain the economy.
They worry about running a big deficit because then that will get added to the debt.
Deficit doves argue that while the private sector should sustain the economy, the government should intervene during times of crisis or low growth.
If that means running a deficit or a debt, that’s okay.
In general, if a country’s economy is growing faster than its debts, then its debts will be a smaller portion of its income and it’s likely to be okay.
Thanks for watching!