Fiscal policy involves the use of government expenditure and the government revenue collection to influence economy, the state of supply demand, output as well as employment.
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A fiscal policy influences both the overall demand as well as the overall supply. As opposed to other macroeconomic policies that try to stabilize economy by controlling interest and revenue supply, the main components of a fiscal policy include taxation and government spending.
The change in revenue collection and government expenditure affects different variables of the economy, e.g. overall demand and the level of economic activities, sharing of resources and the level of income distribution.
A fiscal policy should involve the following components: Successful solutions to financial crisis. These are very important as they determine the achievement of a sustainable growth. A successful solution to financial crises is exemplified by Korean authorities, whose continued support to their financial sector reduced the problems facing the economy. This reduced the need to change their fiscal policies.
On the other hand, Japan’s fiscal policy failed because solutions to problems facing it were not taken care of well in advance. Solving the financial sector crises always come before solving the crises in the macro economy. Therefore, methods and means of solving challenges that face the financial sector should be clearly stated in the fiscal policy.
A fiscal policy should also include a fiscal stimulus. This is very important especially when the financial crisis affects the corporate sector and individual citizens. In such cases the government can move in and assist by printing more money or borrowing from other countries and directing it into the economy to curb the crises.
The fiscal policy should have specific details of the crises to ensure success in countering it.
The fiscal policy that Spain has adopted is cutting down the government’s spending and protecting the rights of those in permanent employment.
Spain is following this policy because, in the Euro region, it has the highest rate of unemployment. Government spending is financed by citizens through taxation and therefore, reducing the governments’ budget means that taxation on citizens is reduced. This will, however, have some negative effects on the economy.
When the rate of unemployment in a country is high, the government can create an increase in demand and market for various products by increasing its purchases.
However, Spain has chosen to reduce the purchases and therefore the market for various businesses’ output will be low, meaning there will be less income and a decrease in consumer spending. When the consumer spending is low, the market for various goods produced locally is further reduced.
This is the multiplier effect and it will lead to low GDP and reduced employment of labor which further affects the countries current state of unemployment.
Following the 1991 macro economic crisis that hit India, a series of economic changes were put in place. These reforms have worked very well in changing the economic situation in India. These reforms included removing barriers and control as well as transforming regulatory institutions.
Improper control of fiscal balance contributed to the 1991 crisis, after which they worked at containing the fiscal deficit. Their effort paid off as the deficit moved from 9.5% to 6.4% of the GDP and the growth rose to 7.5% in 1997. This has proven to be the right policy because of its success in India’s recovery from the crisis that had hit her.
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As the international monetary fund recommends, countries should follow an expansionary fiscal policy because it deals with government spending and taxation which are major contributors to economic growth. This means it is different from other macroeconomic policies that stabilize economy by controlling interest and revenue supply.