How fiscal Policy works
In one of my last blog posts I was talking about monetary policy, how it works and why it has such a big influence on the markets. In this post I like to talk about the other big player in today’s market: the government.
And I don’t want to talk about the government being a lousy steward of money, corruption and all the senseless programs only started to give scrapped politicians something to do. As all these things come with its own issues, I’d like to focus today on the fiscal policy.
Money is created by the government
In short money is created by the government going into debt and promising to repay that debt. The reason they can do that is simply because they are allowed to tax you. And therefore promise that however ridiculous amounts of money they foolishly spend, another one will be forced to pay it back. (the other one means you, just in case you wondered :-D).
So, we now have the two main functions that the government uses to reach their targets, taxes and spending. The main targets of a government are economic growth and unemployment (especially of those already mentioned scrapped politicians and other people of course too).
Low Taxes
When a government lowers taxes, consumers now have more money to spend on goods and usually they will do so, hence creating economic growth. At the same time companies, another big part of the economy, have more money to invest in new machines or hiring people as well. So low taxes are good for both: economic growth and employment.
High taxes
On the other side with high taxes, there is less money to spend and less earnings and therefore less investments and spending in the private sector. Which means that companies are forced to let people go and customers will spend less and start to save money. Both effects will be negative on the economy.
Of course, the government may use these taxes to do their own spending and therefore increase the economic growth again where it can’t be done by the private sector. They also might use the budget to hire more people and invest in projects to cut down unemployment. As it might be beneficial that the government steps in in times of economic decline and dampens the effects of a recession. Generally it seems that governments are not good dealing with money and companies steered and owned by countries tend to be wasteful and have the lowest productivity.
Either way the government is a big spender and certainly can influence both economy and unemployment. Thankfully governments come with bureaucracy and you can count on its inefficiency. Otherwise they would have already taken over
...and we would be likely to pay even more than 100% taxes. 😉
