Notes
Slide Show
Outline
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Some Aspects of Fiscal Policy You Should Know
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Types of Deficits or Surpluses
  • Actual Deficit or Surplus
    • Difference between government spending (G) and tax revenue (T) for a fiscal year.
    • If G > T, a deficit exists.  If T > G, a surplus exists
    • A deficit does not necessarily indicate that too much is being spent, since tax revenue changes automatically with the state of the economy and the size of the economy (economic growth).
    • A deficit can result from economic weakness (tax revenues fall with a weak economy and entitlement spending like Unemployment Insurance rises)
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"Structural Surplus/Deficit – the budget..."
  • Structural Surplus/Deficit – the budget with business cycle effects removed
    • A hypothetical measure to gauge how much fiscal policy will influence the economy after extracting the effects of the current state of the economy
    • Compare current government spending (G) with what tax revenues (T) would be at full employment (even if not there now). The difference between these is the structural surplus (if T > G) or deficit (if G > T)
    • Fiscal policy is expansionary when there is a structural deficit (not necessarily with an actual deficit)



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"Cyclical Surplus/Deficit – effect of..."
  • Cyclical Surplus/Deficit – effect of the state of the economy
    • The difference between actual deficit or surplus and the structural deficit or surplus
    • This is influenced by current levels of economic activity
    • In “bad” times – (real) tax revenues fall, and entitlement spending rises (both are keyed to the state of the economy), resulting in cyclical deficits
    • The opposite occurred during the end of the last recovery, when the economy was stronger
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"Fiscal Dividend – the benefits..."
  • Fiscal Dividend – the benefits of growth
    • Economic growth increases both employment and income, and, with an  income tax system, this automatically produces more tax revenue. The added tax revenue resulting from economic growth is fiscal dividend
    • The more rapid is economic growth, the greater is fiscal dividend, allowing more spending to be “affordable”
    • Rhode Island is a lagging economy, so its fiscal dividend is not as great as it would be with more rapid growth. This has made a number of desirable spending items “unaffordable”
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"Economic growth is related to..."
  • Economic growth is related to the types of spending that a state economy engages in. A critical dichotomy exists:
    • Consumption oriented: spending that does not enhance future production or income directly
    • Investment oriented: contributes directly to production, income, and infrastructure (ex: educational spending for human capital)
    • The greater is investment-oriented spending, the more rapid is economic growth
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Putting This Together