FISCAL POLICY

Fiscal policy is a term that denotes the approach that government takes to managing the income it collects—usually termed taxes —and the expenditures of those taxes. It refers ordinarily to any level of government, including federal, state, municipality, and occasionally private organizations such as Girl Scouts and Boy Scouts, private and public organizations, and many other thousands of similar organizations.

The term fiscal refers to timing. It is an invention designed to maximize the convenience of establishing various beginning and ending times. An example would be a fiscal year that begins on October 1 and ends on September 30. Fiscal policy is manifested in a government's policies on taxation and expenditures. To obtain funds for their operation, government units generally collect some form of taxes.

Particularly in the case of the federal government, the expenditure of these funds not only provides goods and services for constituents, but, additionally, has a direct impact on the economy. For example, the expenditures of the tax dollars may exceed the amount of the funds received by the government. (The government spends more than it receives.) The resulting deficit tends to stimulate the economy. As goods and services are produced for government purchase, it puts extra money into the economy and into the hands of the producers of those goods and services.

But what if the expenditures of the government are fewer than the tax dollars received? (The government spends less than it receives.) The resulting governmental surplus curtails the economy because now the government does not buy as much, and fewer dollars get into the economy.

THE FEDERAL BUDGET

In the United States, the fiscal process of the federal government begins each February with the president sending to Congress a proposed federal budget for the coming fiscal year, which begins in October. Congress then develops a budget resolution, which is to be completed by April. The budget resolution contains overall revenue and spending budgets as well as the budget amount of discretionary and mandatory spending for each functional area, such as discretionary and mandatory spending.

BILLS THAT PROVIDE BUDGET AUTHORITY

Bills that provide budget authority for annual discretionary spending must be completed by June each year. Legislative changes can also be made for mandatory spending or tax provisions at this time. Any legislation that would cut taxes or increase mandatory spending, however, must be accompanied by legislation that would raise revenue or cut spending in other areas to pay for these changes. Consequently, any new legislation in this area must be "budget neutral" (income and spending must be equal).

According to the Financial Management Office, in fiscal year 2004, receipts for the U.S. budget totaled $1,879,799 billion. Outlays totaled $2,292,352 billion. The deficit was $412,553 billion. (Differences between any two figures may not be equal because of rounding differences. Sources of the above data are the Financial Management Service, U.S. Department of the Treasury; and the Congressional Budget Office.)

FEDERAL GOVERNMENT REVENUE

Individual income taxes have been the federal government's largest source of funds for many years. Individual income taxes for the years 1999–2004 are as follows:

1999 $879,480 billion
2000 $1,004,461 billion
2001 $994,339 billion
2002 $858,545 billion
2003 $793,699 billion
2004 $808,958 million

The enormous impact of the Social Security system on the federal government's budget is without question as it is the largest outlay of the federal government every year. In 2004 total Department of Health and Human Services outlay was $543,215 billion. In 1998 the same outlay was $359,700 billion.

Defense spending was the largest item of discretionary spending in the federal budget. In 2004 the amount was $437,111 billion.

INTEREST ON THE FEDERAL GOVERNMENT'S DEBT

In 2004 the public debt of the United States was $739.1 billion. This amounted to $25,182 per capita for the United States. In contrast, the debt per capita in 1990 was $13,000. The interest paid in 2004 was $321.6 billion.

Though fiscal policy could be an automatic stabilizer for the economy because it automatically responds to changes in economic activity, government spending on such items as unemployment benefits generally increases during a recession, moderating the extremes of the business cycle, whereas government receipts such as income taxes will fall during a recession, also moderating the extremes of the business cycle. Consequently, fiscal policy, along with monetary policy—which is dictated by the Federal Reserve—has an important influence on the health of the economy in the United States.

see also Government Role in Business

bibliography

Bruce, Neil (2001). Public finance and the American economy (2nd ed.). Reading, MA: Addison-Wesley.

Citizen's guide to the federal budget: Budget of the United States government (1996—). Retrieved March 5, 2006, from http://www.gpoaccess.gov/usbudget/citizensguide.html

G. W. Maxwell