2/29/2024 0 Comments Government budget balance formula![]() This is because high taxes can foster a misallocation of resources and create work and savings disincentives, and government spending at the margin may be less productive than private spending. Indeed, structural fiscal adjustment may be needed even when stabilization is not an issue. When attention shifts to the supply side of the economy, the structure of fiscal policy takes on greater significance, and simple indicators of fiscal policy stance become less useful. These complexities are discussed below in relation to the effect of the way a deficit is financed, special measures of fiscal impact that may complement the overall balance, the time frame of analysis, and possible alternative definitions of the government sector and fiscal balance. Moreover, as a simple indicator, it abstracts from the range of items that comprise government operations-importantly, the way the deficit is financed-as well as from the particular institutional and other factors that affect the impact of fiscal policy in any country. Since it offers a perspective on the aggregate demand effects of fiscal policy, it is, not surprisingly, deficient as an indicator of the impact of fiscal actions on other policy variables of concern (growth, monetary stance, sustainability, etc.). While the overall balance is an important indicator for assessing fiscal policy, it is a measure that needs to be judged with caution. Developments in the overall balance over time, particularly when related to GDP (or GNI), provide an indication of the changing impact of the government sector on the economy. As a starting point for analysis, an overall deficit (surplus) would suggest an expansionary (contractionary) fiscal stance on the basis that the negative impact of taxes and other revenue on aggregate demand is more (less) than offset by the positive effects of government spending. 6 This balance may be in surplus or deficit. ![]() Also, taking into account the way in which the budget affects, and is affected by, other economic variables can require important adjustments to official data.Ī commonly used indicator to assess the stance of fiscal policy is the overall balance, which measures the difference between revenues and grants, and expenditure and net lending. Usually, this requires analysis of policies effected both inside and outside the budget. The reality is often different considerable efforts are frequently required to piece together accurate and conceptually appropriate indicators of the impact of fiscal policy. ![]() Ideally, such indicators should reflect a comprehensive coverage of the government's activities and be easily derived from budget documents and other available statistical sources. Given the size and complexity of most government budgets, it becomes important to develop broad indicators that convey a sense of the impact of fiscal policy on domestic demand and financial resources. How Should the Fiscal Stance Be Assessed?
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