In the past few years, and more specifically, the past few months, the fiscal policy of the United States of America has often made front-page news. From the 2008 recession to the recent government shutdown, which related to the issue of the budget deficit, America’s fiscal policy has, no doubt, for many reasons, been in the spotlight. This paper will explore the fiscal policy that has borne so much attention. Firstly, it will look at who controls fiscal policy. By focusing on the President, the Office of Management and Budget and Congress, we can consider the people behind the numbers and legislature and the roles that they play in the fiscal policy process. Secondly, this paper will consider exactly what fiscal policy entails – its basic principles and how the American government uses it and to what effect. Finally, I will discuss the current fiscal situation in the United States. I shall do this particularly by focusing on the nation’s spending and debt.
There are many people in Washington D.C. who take part in the complicated process that is the establishment of a fiscal policy. Ultimately, each February, the President presents a budget plan to Congress. (Exactly what this plan consists of will be discussed later.) Congress then plays an integral role in the instigation of the nation’s fiscal policy. However, before considering that role, notable are the many people who prepare the budget for examination by Congress, most of whom work in the Office of Management and Budget (OMB).
Those working for the OMB are a varied group politically speaking. There a number of positions for which the President selects the candidate and who then must be confirmed by the Senate. These positions are the Director, Deputy Director, Director for Management, and the administrators of three major offices, Information and Regulatory Affairs, Federal Procurement Policy and Federal Financial Management. The rest of the OMB “is staffed by career civil servants who remain from one administration to the next regardless of the partisanship of the President” (Tomkin 3).
The OMB bears many responsibilities for preparing the President’s budget, ultimately aiming to present a budget that maximizes the effectiveness of government spending. As such, it appraises the efficiency and success of the policies and programs into which the government intends to (and already does) put its money. The OMB also compiles a priority list for the expenditure and confirms that all proposed programs and legislation fall in line with the President’s policies and budget concept. The OMB is also supported by several offices. The Budget Review Division (BRD), for instance, investigates the highly technical facets of the budget and estimates overall governmental spending.
As stated, members of Congress also play an essential in the instigation of a fiscal policy. Once the budget is finally prepared, Congress then examines it, picking it apart at various stages. First, the whole is considered – how much, overall, the government intends to spend and tax. From there, that whole figure is split and examined next are the overall budgets for the different divisions that constitute it, divisions such as social security, health, and national security. In turn, congress then surveys these individual groups more closely, considering each appropriation bill, those which state exactly where the money will go. In order for the President’s budget to be instated, Congress must sign each of these bills. This can be an extremely lengthy process. While, as stated, the President proposes the budget in February, often Congress does not finish examining the bills until September.
Now that we have considered who is behind fiscal policy and the various roles they play, we can explore what fiscal policy actually entails. Used alongside monetary policy (whereby a central bank affects the country’s stream of money), fiscal policy is essentially the way that the government regulates the country’s economy by altering its taxation rates and expenditure. It is grounded in the theories of John Maynard Keynes, a British economist who proposed that, by doing this, the government is able to impact productivity at the macroeconomic level; the idea being that these alterations can limit inflation and, in turn, increase employment and generally maintain a healthy economy.
There are some basic principles that outline how the nation’s government attempt to use fiscal policy to promote a good economy. Firstly, a ‘tight’ or ‘contractionary’ fiscal policy occurs when the government’s takings are larger than its output; meanwhile, there is a ‘loose’ or ‘expansionary’ policy when output is larger than takings, in other words, there is a deficit. (Notably, however, the fiscal policy emphasizes the change of the deficit. Consequently, even if the deficit remains large after a significant decrease, this is a contractionary policy.) With these concepts in mind, one can consider how and why the American government manipulates fiscal policy in order to impact goods and services and the gross domestic product to create a healthy, balanced economy.
Fiscal policy’s almost instantaneous impact is a modification upon the demand for services and goods. For instance, the contractionary policy can increase demand in two ways. First off, demand rises if the government simultaneously maintains taxation consistency and raises its expenditure. Secondly, tax cuts increase a household’s usable income. While more money is, accordingly, spent on goods, the increased consumption rate will raise the overall demand for goods. These fiscal changes also affect the gross domestic product; increased demand for goods results in increased productivity and prices. As such, whatever the state of the economy, the government can utilize these results to balance it out and promote its health. For instance, if the country is in recession, the government can employ an expansionary policy. This can support the stimulation of the economy by increasing productivity and demand – which in turn, increases jobs and cash flow. Alternatively, the government could ‘pump prime’. This aims to promote jobs and spending by offering citizens greater spending power through decreased taxes whilst, simultaneously, the government increases expenditure into projects that create jobs. Likewise, if the country is in the midst of an economic boom, inflation (which ideally remains at 2-3%) can be a serious threat. At these times, a contractionary fiscal policy can decelerate the economy, maintaining a healthy worth for the dollar.
The significance of fiscal policy and the concept of this economic balancing act is highly apparent when we consider January, 1st 2013. Leading up to this date, there were great fears that the United States would be pushed off the ‘fiscal cliff’. This is because the sequester (which planned to decrease government spending by about $1.1 trillion over eight years) was being instated alongside greatly increased taxation. The fear was that these factors would force the economy to suffer under the combined strain of low demand, low gross domestic product, and high unemployment. As such, on the first day of 2013, the American Taxpayer Relief Act of 2012 was passed, preventing mass tax breaks from expiring, raising certain taxes for high-income homes and delaying the sequester.
The Taxpayer Relief Act conveys one example of the United States’ fiscal policy. Now we can explore, more broadly, the country’s fiscal and debt situation. First, consider the budget deficit. A deficit occurs when, in a particular year, the money obtained through taxation is less than what the government spent. The budget deficit for 2014 is projected to be about $744 billion. Although this sounds incredibly large, it is in fact much less than the record high we saw in 2009 – about $1.4 trillion. The United States’ debt, meanwhile, is the overall number that the country owes and every year. In 2000, this overall debt was $6 trillion dollars. However, due to many factors, a large one being the great expenditures for the ‘War on Terror’, this number is now almost three times as large, at around $17 trillion.
There are four important aspects of America’s debt to consider. The first is that the nation’s debt racks up a huge interest. In fact, about 5% of the budget every year is devoted to paying it. The second point to examine is what is known as ‘public debt’. Every year, as the deficit is incorporated into the national debt, the Treasury sells ‘Treasury bonds’ to the public in order to obtain the money to deal with the deficit.
Another aspect of debt to consider is the money that, yearly, the government loans to itself. The government chiefly obtains this money from the Social Security Trust Fund in the form of Government Account Securities, a kind of ownership that is easily traded and priced. This money raises an interesting issue. For while these loans remain within the government and so are not added to the deficit, as the generation of Baby Boomers retires, more money from the Social Security Trust Fund will be used than will be replaced by taxes. While there is currently no governmental plan set to deal with this situation, legislators will have to engage fiscal policy – either government expenditure must decrease or taxes must increase. The last point pertaining to debt to consider is the major fear that creditors will grow increasingly worried at how the United States can pay back their rising debt. As such, in order to make a trade-off for their higher-risk investment, they demand higher interest payments, which, in turn, dull the American economy.
As discussed earlier, even if raising the debt, increased government spending can boost America’s economy by raising demand for goods, and, ultimately, decreasing unemployment. However, if one looks further into the future, one can see that growing debt is not a positive force for the economy. One possible outcome is that the American government will want to allow the value of the dollar to decrease – cheaper dollars means an overall cheaper repayment. However, if the government did this, it could have several negative knock-on effects. For instance, purchasing American Treasury bonds will not be seen as such an attractive investment. As stated earlier, this would push up the interest rates, and, ultimately, this can dampen the American economy.
This paper has explored fiscal policy in the United States. First, we considered the main people who control policy and the roles they play; the President, who proposes the budget, those who work for the Office of Management and Budget, who prepare the budget, and finally Congress, who examine and pass it. Next, we considered what fiscal policy entails and how the American government uses it to manipulate particular economic situations. Fiscal policy aids the government in creating a balanced economy, with a good level of demand for goods and services, low unemployment and healthy value of the dollar. Finally, we broadly considered the fiscal situation in the United States by exploring certain fiscal policies and the debt situation. All in all, this paper has conveyed the roles and the importance of fiscal policy within the United States.
Tomkin, Shelley Lynne. Inside OMB politics and process in the President's Budget Office. Armonk, N.Y.: M.E. Sharpe, 1998. Print.