Government expenditure multiplier formula. Government expenditure multiplier
In the article below we will try to consider the multiplicative theory of government spending, which, during the popularity of Keynesian teachings, caused a lot of resonance and controversy. The topic will be of interest to everyone who is not indifferent to the modern economy, since in the conditions of the shaky policies of various powers it is more relevant than ever.
The role of multiplier theory in modern economics
Often, in order for a country to justify its policies in economic terms, a number of macroeconomic tools are used. Government expenditure multipliers are one of the components of this wide list, and therefore have an impressive theoretical background. Over the course of several centuries, many scientists have tried to uncover the meaning of this concept and use it within the limits of practical application.
In its broadest sense, the multiplier shows an increase in economic indicators. And Russia is no exception. Representatives of Keynesian macroeconomic theory approached this concept more deeply, and it was they who reached the conclusion that this tool shows a direct relationship between the dynamics of national wealth and the level of well-being of the country’s population, regardless of the direction of the latter’s fiscal policy.
Autonomous expenses and multiplier
The state and the economy are closely interconnected, so it’s no secret that any changes in one institution always entail a certain dynamics of individual values of the other. This process can be called inductive, since only a small push from one of the financial instruments gives rise to a number of processes in the whole country.
For example, the autonomous expenditures of the state in the multiplicative theory are explained by the relationship with changes in the dynamics of the labor market. In other words, as soon as the government incurs certain costs in the context of certain places where they arise, one can immediately observe a characteristic increase in citizens’ incomes. And, accordingly, an increase in employment. To obtain a quantitatively justified picture, it is enough to correlate the dynamics of these indicators with each other.
Investment costs
The structure of government spending is quite extensive, so it is worth paying due attention to the country's investment activity, which is the basis of a healthy competitive economy.
The investment cost multiplier shows the ratio of the dynamics of the level of investment in a particular innovative business to the level of variable operating costs. In this case, it is considered correct to take into account only the financial flows excluded from it.
In other words, according to such a methodology, we will be able to track the level of expenses incurred by the state in order to improve technological and scientific processes in the country, as well as their share in overall economic flows. In general, there is nothing complicated in this dynamics - in the absence of investments, the level of consumption will be equal to zero, but with increasing investments it will increase.
Employment market costs
The government expenditure multiplier in terms of the labor market is a separate neo-Keynesian doctrine that is difficult to compare with any other direction. Because, if earlier we positioned the total costs of the state as a secondary phenomenon, now let’s see what might entail in addition to the results we are accustomed to.
It’s trite, but few manage to track the following relationship. Employment market costs fall significantly at a time when investment costs rise. It follows that the well-being of the population increases, and accordingly, the demand for essential goods (equipment, clothing, furniture) expands, giving rise to a positive trend in changes in the income of their producers. In other words, investments in one area of the economy entail an increase in profits in another.
Fiscal costs of the country
The multiplier of government taxes and expenses in the fiscal aspect indicates the dynamics of changes in the level of output in the manufacturing sector, depending on the increase in the rate. Typically, this coefficient is negative, since few business representatives want to give part of their net profit in favor of budget shares.
It’s a different matter if we are talking, for example, about a differentiated tax on personal emergencies or personal income. In this case, the burden is imposed in stages, depending on the financial level of the object: the higher the welfare, the lower the rate. But, as modern practice shows, in a market economy, this theory is just a utopia and has nothing to do with modern realities.
Balanced budget in general government expenditures
Government expenditure multipliers in their pure form show the dynamics of changes in the value of the gross national product, depending on what part of the state treasury was spent on purchasing various types of products. Also, this indicator is inversely proportional to the marginal consumer propensity of the population. This can be explained by such an increase in budget income when, with a reduction in its expenses, part of its profit is limited to the same number of items.
Thus, we can derive the formula for a balanced budget: national expenditure can grow by a certain amount (let’s call it A), which is caused by a cumulative reduction in the tax burden for entrepreneurs, and this, in turn, is fraught with an increase in the net profit of entrepreneurs by A units.
Country's foreign trade costs
The government spending multiplier (the measurement formula varies depending on the key component whose dynamics we are trying to determine) also plays a significant role in the formation of an open economic policy. The latter is realized only through the practical use of export-import operations. Therefore, we can say with confidence that foreign trade plays not the last, but rather the key role in the formation of costly items of state economic policy.
In the multiplicative theory, it is worth noting that the costs incurred by a country in order to implement export-import operations, aimed at indirectly interfering in the balance sheet of another country, directly affect the value of the gross national product, which is a purely internal instrument.
Thus, the value of the multiplier in terms of foreign trade is defined as the ratio between quantitative changes in GNP and the costs of open operations carried out outside the country.
conclusions
Based on all of the above, one very interesting conclusion arises. We tried to prove that government spending multipliers fully reflect the relationship in changes in key financial instruments of government economic policy. And we probably succeeded quite successfully.
We were able to see that the budget balance is so precarious and susceptible to various elements of both the domestic and the country that we can say with complete confidence: not a single process passes without a trace, much less autonomously. Government spending multipliers will always be able to help us derive the magnitude of income growth, national product and many other indicators that indicate the economic health of the state.
The essence of the stabilization policy constantly pursued by the government comes down to the state’s influence on aggregate demand and (or) aggregate supply in order to maintain their dynamic equilibrium at the desired values of employment, price level and income. The main goal of state economic policy is maintaining the economy at full employment. This guarantees the absence of unemployment and inflation.
The modern market economy, with all the diversity of its models, is characterized by a socially oriented economy, which is supplemented by government regulation.
Performing the functions of state regulation is impossible without centralizing the funds necessary for:
- maintaining the social sphere and social protection of the population(health care, cultural development, payment of wages to budgetary institutions, pensions and benefits, financing of preschool institutions, financial support for the poor, etc.);
- development of priority areas of the economy(financing research and development, support for the agro-industrial complex, redistribution of funds between sectors of the national economy, etc.);
- ensuring the defense and security of the state(maintaining the army, financing the military-industrial complex);
- support of international relations(contributions to international organizations to ensure state participation in them, etc.).
To perform all these functions, the government of the country develops and implements a budget-tax (or fiscal) policy, which combines measures to form an integral structure of the budget system and the tax system of the state.
Fiscal policy(from Latin fisc - tax) - a set of government measures to collect taxes and spend state budget funds to achieve macroeconomic equilibrium at the level of full employment in the absence of inflation.
Keynesian theory considers this policy as the most effective instrument of government influence on economic growth, employment levels and price dynamics, because the state does not express private interests, like firms and households, but public ones. In the Keynesian model of economic equilibrium, the stabilizing role of fiscal policy is associated with its impact on equilibrium GNP (NNP, ND) through changes in aggregate expenditures (aggregate demand).
Fiscal policy includes only those budget manipulations that are not accompanied by a change in the amount of money in circulation.
Fiscal policy consists of discretionary and automatic.
Discretionary fiscal policy (Latin discrecio - acting at one's own discretion) is a conscious change in the amounts of taxes and government spending by the government in order to achieve macroeconomic equilibrium at the level of full employment in the absence of inflation.
The main instruments of this policy:
1. Change in the volume of government procurement of goods and services ( G).
2. Change in the amount of income tax (T).
The nature of discretionary fiscal policy is greatly influenced by the state of the economy; at different phases of the economic cycle, this policy uses different instruments (Fig. 8.1).
Rice. 8.1. State economic policy during periods of recession (A) and rise (b)
During a period of economic downturn (insufficient demand), stimulating discretionary policy ( fiscal expansion policy, expansionist), which consists of an increase in government spending and tax cuts, which prevents a fall in production and is aimed at increasing aggregate demand. The task of state economic policy during the economic downturn(see Fig. 8.1, a) - achieve an increase in production volume Y* up to potential level Y 1 and achieving full employment by increasing planned spending ( AE- aggregated expenses).
During periods of economic recovery (excess demand), restraining (restrictive) fiscal policy aimed at reducing aggregate demand by reducing government spending and (or) increasing taxes. The task of state economic policy during the economic boom(see Fig. 8.1, b) - achieve a reduction in production volume Y* up to potential level Y 1 and eliminating excess employment by reducing planned expenditures ( AE).
It is also often used combined fiscal policy, which is the use of both instruments simultaneously.
By thus influencing aggregate demand, discretionary fiscal policy affects the amount of equilibrium output in the country. This influence has a multiplying nature and is measured using multipliers government spending(procurement), taxes And balanced budget.
Government expenditure multiplier (m G) - the ratio of changes in equilibrium output and income to changes in the amount of government purchases of goods and services, showing how many times the final increase in total income exceeds the initial increase in government purchases of goods and services that caused it.
Let us consider this multiplier effect using the example of stimulating fiscal policy (Fig. 8.2).
Rice. 8.2. Government expenditure multiplier effect
Increase in government procurement of goods and services by ?G shifts the planned expenditure function AE upward and shifts the equilibrium point from position 1 to position 2. A change in government spending has a clearly multiplier effect, since the final increase in planned spending ?AE and total income ?Y greater than the initial increase in government purchases ?G.
During the economic period rise In order to reduce production and employment, government purchases of goods and services are reduced. Then the amount of planned expenditures is reduced by the amount of the reduction in government purchases of goods and services ?G. At the same time, output volume and total income are reduced by more than ?G thanks to the multiplier effect (see Fig. 8.2 - reverse transition from point 2 to point 1).
Its calculation formula is similar to the investment multiplier:
This can be proven algebraically for a three-sector economy (with government participation). At the point of balance Y = AE = C + I + G = (a + MPC*Y) + I + G. Let's solve this equation for Y:
From this it is obvious that .
Since MRS< 1, то мультипликатор государственных закупок всегда больше единицы.
It should be noted that exactly the same multiplier effect is achieved by an increase in any component of autonomous spending (see topic 5)
The economic meaning of the government spending multiplier. When government spending increases, planned total spending increases by ?G. In response to the same value, the volume of production will increase, and therefore total income: ?Y 1 = ?G (?Y 1 is the primary increase in total income).
An increase in total income will, in turn, cause an increase in consumer (and with them total) planned expenditures on MRS * ?Y 1. Thanks to this, production volume, and therefore total income, will increase by the same amount: ?Y 2 = ?Y 1 * MPC = ?G*MRS (?Y 2- this is a secondary increase in total income, etc.).
A new increase in income will cause a new increase in consumer (and with them total) planned expenses, now by MPC*?Y 2.
Then the volume of production, and therefore total income, will increase as follows:
?Y 3 = ?Y 2 * MPC = (?Y 1 * MPC) * MPC = (?G * MPC) * MPC etc. to infinity.
In general:
?Y n = ?U n -1 * MRS = ?G * MRS n -1 .
Hence, an increase in government purchases leads to a multiple (multiplicative) expansion of total income and planned expenses.
Tax multiplier (m T) is the ratio of the change in equilibrium output to the change in tax revenues, showing how many times the final increase in total income exceeds the initial change in the volume of income taxes.
In the presence of income taxation, the disposable income spent on consumer spending and savings becomes less than total income by the amount of taxes collected. The consumption function takes the form: .
During an economic downturn, income taxation is reduced in order to increase production and employment. At the same time, households' disposable income increases and their consumer demand increases. Then the volume of planned expenditures will increase, and the volume of production and total income will also increase, and by more than the amount of tax cuts due to the action tax multiplier.
A graphical representation of the tax multiplier effect when implementing a stimulating fiscal policy is presented in Fig. 8.3.
Rice. 8.3. Tax multiplier effect
Reducing income taxes by ?T increases household disposable income by the same amount ( ?Y d = -?T). This increase in disposable income will be used to increase savings by MPS*?Y d = -MPS*?T and to increase consumption by the amount MPС*?Y d = -MPС*?T. As a result, the planned expenditure function will shift upward by the amount MPС*?T and the equilibrium point will shift from position 1 to position 2. A change in income taxation has a multiplier effect, since the final increase in planned expenses ?AE and total income ?Y modulo greater than the original income tax cut ?T.
The tax multiplier is always less than the government spending multiplier, because When taxes change, consumption changes partially (part of the disposable income is used for savings), while each unit of increase in government spending has a direct impact on output and income.
That's why:
The minus sign means a negative impact of tax increases on output and income.
This can also be proven algebraically. At the equilibrium point there is equality Y = C + I.
Let us introduce the consumption function taking into account taxation:
Let's solve this equation for Y:
From here it is obvious that
Where is the tax multiplier.
The modulo tax multiplier can be greater or less than one, but in any case, modulo it is less than the government purchase multiplier according to (8.2).
During the period of economic recovery, in order to reduce output and employment, the level of income taxation is increased. Then the volume of planned expenses will decrease by? T*MRS. At the same time, production volume and total income are reduced in modulus by more than? T due to the action of the tax multiplier (see Fig. 8.3 - reverse transition from point 2 to point 1).
The economic meaning of the tax multiplier. The reasoning is largely similar to the conclusion of the government procurement multiplier. With a reduction in income taxation by ?T planned expenses increase by - ?T*MRS. In response to the same value, the volume of production will increase, and therefore total income: ?Y 1 =-?T*MRS. Further development of the process of multiplicative expansion of planned expenditures and total income will occur in the same way as in the case of an increase in government purchases.
In general:
?Y n = ?U n -1 * MRS =- ?T * MRS n.
At the end of the process of multiplying income expansion, the total increase in total income will be (according to (5.8)):
Hence, a reduction in income taxation also leads to a multiple (multiplier) expansion of total income and planned expenses.
The simultaneous impact of changes in government spending and income taxes on changes in output and total income is represented by the following formula:
Balanced Budget Multiplier shows that identical increases in government spending and taxes lead to an increase in equilibrium output by the amount of their increase (this is obvious from (8.3)). A change in government spending has a greater impact on total spending than a change in taxes of the same magnitude. Government spending directly and directly affects total spending, and a change in the amount of taxes affects indirectly - through a change in after-tax income, which changes the amount of consumer spending. It is always equal to 1 (as in), which is equivalent to the absence of multiplicative effects. That's why compliance with the budget balance rule sharply reduces the effectiveness of fiscal policy.
Government spending‒ these are the expenses of the state to perform its functions, as well as to purchase goods and services for its own consumption or to regulate demand in goods markets.
Government spending has a direct impact on national output and employment, along with household consumption spending and firm investment.
Government expenditures have a multiplier effect, which is determined through the indicator i the government expenditure multiplier.
Government expenditure multiplier‒ this is the ratio of the increase in gross domestic (or national) product due to the increase in government spending:
where m g is the government spending multiplier;
ΔY – absolute increase in gross national product;
ΔG is the absolute increase in government spending;
MPC is the marginal propensity to consume.
The effect of the government spending multiplier is displayed on the Keynesian cross chart (Fig. 15.3). If government spending increases by ΔG, then the planned spending curve shifts upward by the same amount, the equilibrium point moves from position A to position B, and the equilibrium output increases from Y 1 to Y 2 by the amount ΔY.
Rice. 15.3. Impact of government spending on national income
If the state increases its expenditures and does not change the amount of tax revenues, then the GDP (GDP) increases several times, since government expenditures give rise to new rounds of consumer spending, which in turn will lead to a multiplying increase in investment.
This multiplier is also defined as the inverse of the marginal propensity to save, namely due to increased consumption by households.
State income and expenditures have a constant tendency to change and adjustment, and, therefore, are under direct regulation and control by the state. The primary factors influencing this process are rising prices, changes in the exchange rate and loan interest.
At the same time, the mechanism of state influence on cyclical fluctuations of the economy allows: during a recession, to increase government spending and thereby increase production output, and during a boom, to reduce expenses, protecting the economy from “overheating.”
The state's fiscal policy reflects not only the impact on the national economy (national production) of changes in the amount of government spending, but also the effectiveness of the system for generating budget revenues primarily through the taxation mechanism.
GDP growth in a closed economy depends not only on consumer and government spending and investment, but also on tax revenues to the state budget.
An increase in tax revenues in a market economy leads to an increase in national income, and by an amount greater than the initial increase in taxes. This phenomenon is characterized by the action of the tax multiplier:
where m T is the tax multiplier; ΔТ – change in tax revenues.
The effect of the tax multiplier is shown in Fig. 15.4.
Rice. 15.4. Impact of Tax Cuts on National Income
The influence of the state on the cyclical fluctuations of the national economy is also manifested in an increase or decrease in the tax burden on households and businesses. Reducing taxes for individuals leads to an increase in personal disposable income and, consequently, to an increase in consumption, which in turn will increase aggregate demand and, accordingly, supply. Reducing taxes for enterprises is also a stimulating measure, since most of the profits remain at the disposal of companies, and the opportunity to increase investments grows (demand for investment goods increases).
Analyzing the formulas for the government spending multiplier and the tax multiplier, we can conclude that the first will always be greater than the second by one. Consequently, the multiplier effect from an increase in government spending will always be greater than from a tax cut. This action must be taken into account when choosing fiscal policy instruments.
If government spending and taxes increase by the same amount, then equilibrium output also increases. In this case they talk about balanced budget multiplier , which is always equal to or less than one.
The balanced budget multiplier does not imply the absolute elimination of any budget deficits or surpluses. We are talking about balancing changes in the revenue and expenditure parts of the budget, that is, maintaining the equality ΔT = ΔG.
Questions for self-control
1. Describe the functions of the budget system of society.
2. Name the main groups and subgroups of budget revenues of the Russian Federation.
3. Name the sections and subsections of the classification of budget expenditures in Russia.
4. Explain the structure of revenues of the consolidated budget of the Russian Federation in 2008 and 2011.
5. What is a tax, and what types of taxes, according to the current legislation of the Russian Federation, are considered federal taxes?
6. What types of taxes, according to the current legislation of the Russian Federation, are considered regional and local taxes?
7. What dependence is reflected in the Laffer curve?
8. Conduct cross-country comparisons of tax rates.
9. What is a budget deficit? Name its main types.
10. Describe the mechanism for financing the budget deficit. Name the internal and external sources of its financing.
11. Name and explain the problems facing the state related to cash and debt financing of the budget deficit.
12. Define fiscal (budgetary and tax) policy. Name its main types.
13. What are the main goals and objectives of fiscal policy?
14. Explain the impact of government spending on national income.
15. Explain the mechanism of action of the tax multiplier.
16. What does the balanced budget multiplier show?
Please do not be late, behave decently, do not talk when answering - stand up, be active in your answers. Do not place bags or bottles on desks; there should be nothing on the table except notebooks and pens.
You need to memorize the definitions that I have printed for you. Look at the progress of solving problems; we will solve such problems.
Students will be rewarded for good answers.
Open lesson topic: Fiscal policy
Before solving each problem, I ask for basic definitions:
Terms for 1 problem:
Budgetary and tax (fiscal) policy government measures to change government spending, taxation and the state of the state budget, aimed at ensuring full employment, balance of payments equilibrium and economic growth while producing non-inflationary GDP.
Expansionary fiscal policy ( fiscal expansion) in the short term, its goal is to overcome the cyclical downturn in the economy and involves increasing government spending G, reducing taxes T, or a combination of these measures. In the longer term, the policy of reducing
taxes can lead to an expansion in the supply of factors of production and an increase in economic potential.
Contractionary fiscal policy ( fiscal restriction) aims to limit the cyclical recovery of the economy and involves reducing government spending G, increasing taxes T, or a combination of these measures.
In the short term, fiscal policy measures are accompanied by the effects of multipliers on government spending, taxes and a balanced budget.
Government Expenditure Multiplier Formula:
– change in the equilibrium volume of production;
– increase in government spending;
- a multiplier that shows how much the equilibrium level of income in a closed economy increases as a result of an increase not only in government, but also in any of the autonomous expenses per unit. The main factor determining the size of the multiplier is the marginal propensity to consume (MPC).
Tax multiplier:
– changes in taxes.
The tax multiplier indicates that when the total amount of taxes increases, income and output grow by an amount that is several times greater than the increase in taxes. The tax multiplier is always negative.
Balanced Budget Multiplier:
The multiplier effect of tax cuts is weaker than that of increasing government spending, which is algebraically expressed as the spending multiplier exceeding the tax multiplier by one unit. This is a consequence of the stronger impact of government spending on income and consumption (compared to changes in taxes). This difference is decisive when choosing fiscal policy instruments. If it is aimed at expanding the public sector of the economy, then in order to overcome the cyclical recession, government spending is increased (which has a strong stimulating effect), and taxes are increased to contain the inflationary rise (which is a relatively mild restrictive measure).
Task No. 1. The economy is described by the following data:
C = 20 + 0.8 (Y - T + F) (consumption);
I = 60 (investment);
T = 40 (taxes);
F = 10 (transfers);
G = 30 (government spending)
Y - production volume
0.8 – marginal propensity to consume
a) Calculate the equilibrium level of income.
b) The government increases spending to 40 in order to stimulate the economy:
What is the size of the government spending multiplier?
c) The government increases taxes from 40 to 50 (at the level of government spending G = 30):
What happens to the planned spending curve?
How will the equilibrium level of income change?
What is the tax multiplier?
How will the state budget balance change?
d) The government simultaneously increases government spending from 30 to 40 and taxes from 40 to 50:
What happens to the planned spending curve?
How will the equilibrium level of income change?
What happens to the multiplier effect?
How will the state budget balance change?
Solution
a) To calculate the equilibrium level of income, we substitute the numerical values of C, 1, T, F, G into the main macroeconomic identity and solve it with respect to Y:
Y = 20 + 0.8 (Y 40 + 10) + 60 + 30.
After algebraic transformations we get: Y=430 => this is the initial equilibrium (point A).
b) With an increase in government spending by 10 (from 30 to 40), the planned expenditure curve will shift upward by 10 (see Fig. 1):
To calculate the change in the equilibrium level of income when moving from point A to point B, we use the formula for the government spending multiplier:
At point B, the equilibrium level of income has increased to 480. The government spending multiplier is equal to:
Before the fiscal expansion, the state budget was balanced:
After the fiscal expansion, arose budget deficit in the amount of 10, since government spending increased by 10, but tax revenues did not change.
c) With an increase in taxes by 10 (from 40 to 50), the planned expenditure curve will shift down by the amount -ΔT*MRS = -10 x 0.8 = -8 (see Fig. 2):
The equilibrium level of output will decrease by:
– tax multiplier formula
The economy will move from point A to point B, where the equilibrium output will be 390.
The tax multiplier is:
After the tax restriction, arose budget surplus in the amount of 10, since the value of government spending and transfers is still 40, and tax revenues have increased to 50.
d) With a simultaneous increase in government spending from 30 to 40 and taxes from 40 to 50, the planned expenditure curve will move up by 2, since the impact of budget expansion on aggregate demand is relatively stronger than tax containment (see Figure 3):
Figure 3
The equilibrium will move from point A to point B, and the equilibrium level of income in accordance with the balanced budget multiplier will also increase by 10 to 440.
This can be checked using the calculation:
Y = 20 + 0.8 (Y - 50 + 10) + 60 + 40;
The economy now has a balanced budget multiplier effect equal to one:
With this policy, the budget will remain balanced, as originally:
Problem No. 2 . (formulas from task No. 1).
The country's economy is characterized by the following data:
Actual income (Y) = $4,000
Marginal propensity to consume (b) = 0.8.
Equilibrium income (Y*) = $4200
a) How should government spending change (other things being equal) for the economy to reach equilibrium (Y* = $4,200)?
b) How should the amount of tax revenue change (other things being equal) for the economy to reach an equilibrium state?
A) Δ Y = Δ G* b, where Δ Y is the increase in income, Δ G is the increase in government spending.
Δ Y = Y* - Y = $4200 – $4000 = $200
M = 1/1- b = 1/1-0.8 = 1/0.2 = 5
Δ G = 40, i.e. government spending should increase by $40.
B) Δ Y = Δ T* taxation multiplier, where T are taxes.
M tax region = = -4
MPS – marginal propensity to save
200 = Δ T * (-4)
Δ T = -50, i.e. taxes should be reduced by $50.
Definitions for problem 3:
The main structural instruments of the state budget are: state budget revenues (taxes, fees); state budget expenditures (financing the economy, socio-cultural programs, defense, management).
The main types of state budget are:
1. Normal - in this case, the expenditure side is equal to the income side.
2. Scarce, i.e. expenses exceed income.
The main forms of a deficit budget are:
- structural deficit- a deficit resulting from deliberate government action to increase government spending and reduce taxes to prevent recessions. This is the difference between expenses (income) and income (expenses) of the budget under conditions of full employment;
- cyclical deficit- a deficit arising as a result of a cyclical decline in production and reflecting crisis phenomena in the economy, the inability of the government to keep the financial situation under control. The cyclical deficit is often estimated as the difference between the actual budget deficit and the structural deficit.
Problem No. 3: Assume that government purchases are equal to 500, the tax function is T = 0.4U, the transfer function is F = 0.2U, the price level is P = 1. The federal debt is D = 1000 at an interest rate of R = 0.1. The actual output (V) is 2000, and the potential output is 2500.
a) Is the government budget balance positive or negative?
b) What is the size of the structural budget deficit?
c) What is the size of the cyclical budget deficit?
a) The state budget balance can be calculated by comparing the expenditure and revenue parts:
Budget expenditures = government purchases (G) + transfers (F) + +expenses for servicing public debt (DxR) = = 500 + 0.2x2000 + 0.1x1000 = 500 + 400 + 100 = 1000.
Budget revenues = tax revenues (T) = 0.4x2000 = 800.
Actual budget deficit = 1000 - 800 - 200.
b) The structural deficit can be calculated by substituting potential output instead of actual output into calculations:
Structural deficit = = 500 + 0.2x2500 + 0.1x1000 - 0.4x2500 = 100.
c) Cyclical budget deficit = actual deficit - structural deficit 200 – 100 = 100.
Related information.
19.Multipliers of government spending, transfers, taxes and a balanced budget.
Government expenditure multiplier represents the ratio of the change in equilibrium GNP to the change in the volume of government spending.
The government spending multiplier shows the increase in GNP as a result of an increase in government spending per unit: m G =1/(1-MPC) MPC – pre-advancement to consumption.
Tax multiplier- is equal to the ratio of changes in equilibrium output (income) as a result of changes in tax revenues to the budget.
The tax multiplier model in a closed economy with a progressive tax system has the form: m t = -MRS/(1-MRS)
Changes in taxes have less impact on the value of aggregate expenditures, and therefore on the volume of national income, since tax increases are partially offset by a reduction in aggregate expenditures, and partly by a decrease in savings, while changes in government purchases affect only aggregate expenditures. Therefore, the tax multiplier is less than the government spending multiplier.
Balanced Budget Multiplier- an equal increase in government spending and taxes causes an increase in income by an amount equal to the increase in government spending and taxes; a numerical coefficient equal to one.
The transfer multiplier is a coefficient that shows how many times total income increases (decreases) when transfers increase (decrease) by one. In its absolute value, the transfer multiplier is equal to the tax multiplier, but has the opposite sign. The value of the transfer multiplier is less than the value of the expenditure multiplier, since transfers have an indirect effect on total income, and expenditures (consumer, investment and government purchases) have a direct effect.
22. Budget deficit and budget surplus. Types of budget deficit. Financing the budget deficit.
The budget deficit is the excess of government expenditures over revenues. Reasons for budgeting. def-ta: 1. The presence of large programs for the development of the economy 2. The presence of a recession in the economy 3. Wars, natural disasters, militarization of the economy 4. A sharp increase in government. expenses due to inflation 5. Expansion of transport. payments, introduction of tax benefits in pre-election years. Types of budget. def: 1) Structural. The image is, if the government deliberately lays down the excess of expenses over income. 2) Real. That cat. it actually adds up. 3) Cyclic. This is the difference between real and structural. Ways to cover the budget. def: 1 – Increasing tax rates or introducing special taxes. 2 – Debt financing (internal and external). Int. duty. finance is the issue and sale of government. securities for internal market to its business entities and consumers. External is the sale of government. foreign securities to you, their governments, business entities and consumers. 3 – Den. financing (monetization of the budget deficit). There are 2 options: Direct issue of money, Provision of the center. bank loans to the government. 4 – External loans. (from foreign governments and international organizations) 5 – Seigniorage. This is the income of the issuing institution, which was obtained due to the monopoly right to conduct monetary policy, including money. emissions. State expenses, financed through the issue of money, carried out through the appropriation of resources in the private sector, purchases. cat ability decreases in terms of inflation, i.e. we are talking about inflation. tax. Ways to regulate budget deficit: 1st concept: the budget must be balanced annually. Problems arise with the implementation of the FP. 2nd concept: the budget must be balanced during the economic process. cycle, i.e. during recessions, the government deliberately goes to the budget. there is a deficit, and during periods of upswing there is a surplus. 3rd “The Concept of Functional Finance”: Ch. the goal is to ensure balance, and for the budget. Def can be ignored. Fin. The situation of the country is considered normal if the budget. the deficit does not exceed 2-3% of GDP or 8-10% of budget expenditures.
23. Public debt and regulation of public debt State debt is the amount of debts of the country to its own or foreign legal entities. and individuals, governments of other countries and international organizations. It includes the amount of accumulated budget deficits, minus budget surpluses and the amount of financial obligations to creditors. Types of government debt: 1) internal (the amount of government debt to its individuals and legal entities); 2) external (sum of backlogs to foreign individuals and legal entities, foreign governments and international organizations). Consequences of internal government debt: 1 - its growth is dangerous for businesses with low incomes and savings, because Our incomes and living standards are falling very sharply, and the crowding out effect is taking place. Consequences of external government debt: 1 – a decrease in the standard of living in the country; 2 – the lender may require the borrower to fulfill certain obligations. The financial position of a country is considered normal if the government debt does not exceed 50% of GDP. Measures to manage public debt: 1) conversion - changing the profitability of loans towards or ↓; 2) consolidation – change in maturity dates usually towards growth; 3) exchange of bonds according to a regressive ratio, this is significant. several previously issued bonds are exchanged for one new one; 4) deferment of loan repayment, used by law when the issuance of new loans does not bring any effect due to high interest rates on government debt; 5) cancellation of government debt - complete waiver of obligations.
24. Using the modelIS – L.M.for fiscal policy analysis. Effectiveness of fiscal policy Stabilization economic policy uses fiscal and monetary policies as instruments of macroeconomic regulation. Let us consider the effect of fiscal policy in the model IS-L.M..
U s U U 2 U
Let us assume that initially general equilibrium in the goods and money markets was achieved at the point E at interest rate G E and income Y E (Fig. 6.10).model IS-L.M. shows that an increase in government spending causes both an increase in income from Y E to U1, and an increase in the interest rate from G E before T\, At the same time, income increases to a lesser extent than expected, since an increase in the interest rate reduces the multiplier effect of government spending: their increase (as well as an increase in other autonomous expenses, tax cuts) partially crowds out planned private investment and consumer spending, i.e. a displacement effect is observed. In the figure, it is equal to Y 2 - Y]. Private spending declines as a result of rising interest rates driven by rising real income, which in turn is driven by expansionary fiscal policy.
The effect of fiscal policy will put the following points: - helps to avoid economic shocks - smoothing out the economic cycle - reducing differences in society - increasing the volume of production due to the growth of AS and AD Let's say the government increases government purchases and reduces taxes. This will lead to 2 consequences: - AD and production volume will increase; - through a reduction in taxes, the AS curve will shift. As a result, the volume of production will increase from Y1 to Y3 Problems of implementing fiscal policy: - it is characterized by long time lags: Internal (from awareness of the beginning of the recession to the need to make decisions; from decision-making to the actions themselves) External (from taking measures to -in the economy) -it is difficult to calculate the impact of fiscal policy parameters on public spending and production volume -crowding out effect (government spending crowds out private spending) 2 reasons for counteracting this effect: 1) Fiscal policy stimulates growth in business activity, private investors can increase their investments even if the interest rate rises 2) When analyzing the crowding out effect, they start from savings, but in the case of fiscal policy, income and savings increase - the problem of implementing an autonomous fiscal policy (when the economy comes out of recession, the autonomous fiscal -th policy slows down the economy) -has an impact on the political-economic cycle -to assess the reserves of the fiscal policy, a full employment budget is used, but it cannot always assess the economic situation of the BNP in the Republic of Belarus: Aimed at stimulating economic growth and structural restructuring in the economy. Directions for its implementation:1) Improving the tax structure by increasing the share of direct taxation2) Reducing the tax burden on the salary fund3) Reducing the tax burden on the economy4) Increasing the stimulating role of customs policy5) Equalizing tax conditions for all categories of payers.
The effectiveness of fiscal policy and economy in the Republic of Belarus.
Fiscal policy is considered eff-noy. ensures the most complete receipt of taxes into the budget, with the lowest costs for their collection. To determine the efficiency, various indicators are used:
Level or tax rate. We must always compare it with the GDP growth rate. = ∑cash receipts/GDP.
- marginal cash rate= ∆income/∆GDP
- tax multiplier, i.e. division between MPC and MPS (MPC/MPS), (for Belarus – 3.8)
- load level by industry sector.
In the Republic of Belarus, the fiscal system, focused on functioning in market conditions, is going through a stage of formation.
Since 1992, the taxation system in Belarus has been in a state of constant reform, which is reflected in the testing of types of taxes, their rates, tax benefits, determining the structure of republican and local taxes, clarifying their functional role, etc.
The budgetary and tax policy of the Republic of Belarus for 11-15 years has the following directions:
radical simplification of tax administration and control procedures, strengthening the country’s position in world rankings;
optimizing budget expenditures and increasing the efficiency of using budget funds;
concentration of budget funds on priority areas of socio-economic development of the country;
increasing the efficiency of public debt management.
reducing the tax burden on profits and payroll of organizations;
improving the efficiency of public financial management;