{"id":199019,"date":"2022-08-06T17:44:51","date_gmt":"2022-08-06T12:14:51","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=199019"},"modified":"2022-08-06T17:45:23","modified_gmt":"2022-08-06T12:15:23","slug":"fiscal-policy-should-return-to-fundamentals","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/fiscal-policy-should-return-to-fundamentals\/","title":{"rendered":"Fiscal policy should return to fundamentals"},"content":{"rendered":"\n

Source<\/strong>: The post is based on an article \u201cFiscal policy should return to fundamentals\u201d<\/strong> published in the Business Standard<\/strong> on 5th<\/sup> August 2022<\/strong>.<\/p>\n

Syllabus: <\/strong>GS 3 Issues and Challenges Pertaining to the Indian Economy<\/p>\n

Relevance: <\/strong>Macroeconomic Conditions; High Inflation<\/p>\n

News: <\/strong>Recently, the US Federal Reserve and the European Central Bank have hiked large interest rates to forcefully bring down inflation.<\/p>\n

Some experts are of the opinion that deficit spending needs to play a much more active role in managing business cycles.<\/p>\n

Evolution in the use of fiscal and monetary policy in the business cycles?<\/strong><\/h5>\n

(1) Before the 2008 global financial crisis, Monetary Policy was the main device to <\/strong>address ordinary business cycles<\/strong>. On the contrary, it was suggested that fiscal policy should play a supporting role, except in the event of wars and natural catastrophes such as pandemics.<\/p>\n

(2) Post-financial crisis 2008:<\/strong> Over the past decade, it has been firmly established that even in normal times, the fiscal policy should also play a more dominant macroeconomic stabilization<\/strong>. Monetary policy<\/strong> could respond immediately, but it was suggested that fiscal policy<\/strong> through taxation and government expenditure should quickly follow and take the lead over time.<\/p>\n

It is true that \u201chelicopter money<\/strong>\u201d and other transfer programs<\/strong> proved extremely effective during the initial stages of the Covid-19 pandemic. These programs helped to cushion individuals while reducing long-term economic scarring.<\/p>\n

However, both monetary<\/strong> and fiscal policy ar<\/strong>e vital to handle a routine downturn in the economy.<\/p>\n

What are the challenges in the conduct of fiscal policy?<\/strong><\/h5>\n

The large and politically divided countries, such as the United States or the United Kingdom, have not figured out how to conduct technocratic fiscal policy on a consistent basis. Because politics is hardwired into fiscal policy.<\/p>\n

There are horse-trading<\/strong> and issues in the implementation of the fiscal measures<\/strong> or transfer programs<\/strong>. The implementation remains inefficient, and these tend to be bigger as the spending bill increases.<\/p>\n

The fiscal measures resulted in increased inflationary pressures<\/strong> and reduced capacity to respond to the supply shocks triggered by the war.<\/p>\n

What should be done now with high inflation and slowing growth? <\/strong><\/h5>\n

(1) Interest rates need to be raised, but not at the pace at which it is happening. This entails a risk of yet another deep recession at the end of 2023<\/p>\n

(2) Some mainstream economists believe that public debt could be much bigger without any negative consequences.<\/p>\n

What should be done?<\/strong><\/h5>\n

The governments should redistribute<\/strong> income on a sustainable basis. It should raise taxes on higher-income individuals and increase transfers to lower-income, especially very low-income, segments of the population. Higher taxes on high-income and upper-middle-income individuals will also lead to the achievement of social cohesion<\/strong>.<\/p>\n

Fiscal policy needs to go back to fundamentals<\/strong> and be recalibrated<\/strong>. There is a need for the readjustment of macroeconomic policy gradually, as it is important to avoid a deep recession.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on an article \u201cFiscal policy should return to fundamentals\u201d published in the Business Standard on 5th August 2022. Syllabus: GS 3 Issues and Challenges Pertaining to the Indian Economy Relevance: Macroeconomic Conditions; High Inflation News: Recently, the US Federal Reserve and the European Central Bank have hiked large interest rates… Continue reading Fiscal policy should return to fundamentals<\/span><\/a><\/p>\n","protected":false},"author":10343,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[10503,216],"class_list":["post-199019","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-business-standard","tag-gs-paper-3","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/199019","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10343"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=199019"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/199019\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=199019"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=199019"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=199019"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}