RUNNING HEAD: FISCAL POLICY

BC’s Action Plan

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31st March, 2011

Introduction

Fiscal policy refers to the use of taxes, transfers by the government or the purchases of goods as well as services in order to get a shift in the aggregate demand curve. They include expansionary fiscal policy which increases the aggregate demand and closes the gap caused by recession and the contractionary fiscal policy which decreases the aggregate demand and eliminates gaps caused by inflation.

Fiscal Policy, Taxes, Transfers and Economy

After the identification of the recessionary or inflationary gaps a government is required to develop and implement an action plan; processes that take time. The fiscal policy in a particular country economy has a multiplier effect where the expansionary fiscal policy increases the GDP while the contractionary has a converse effect on GDP. There is a larger multiplier on changes resulting from purchases by the government than those in taxes or transfers since part of the latter is absorbed by savings. Therefore a more powerful effect on the economy is created by changes in purchases by the government than similar changes in taxes and transfers. The size of the multiplier and the size of business cycle fluctuations can be reduced by some rules that govern taxes and transfers which act as automatic stabilizers. With relation to budget balance, discretionary expansionary fiscal policies cause a decrease by making budget surplus smaller or a bigger budget deficit while on the converse contractionary fiscal policies result in an increase that is a bigger budget surplus or a smaller budget deficit. For example, an increase in government purchases of goods and services, higher government transfers or lowered taxes for the former and vice versa for the latter (Krugman, Wells and Myatt, 2006).

Due to the effects of that the business cycle has on budget balance fluctuations, there is need for the government to make an estimate on the budget balance that is cyclically adjusted so as to separate them from those caused by the discretionary fiscal policy. The budget balance rises and moves towards deficit during recessions while it falls and moves towards its surplus throughout expansions.

Since the accounting of government budget is calculated based on fiscal years deficits have long term effects as they increase public debt. Rising government debt may cause a big problem since they crowd out investment spending which cause a reduction in the long term economic growth. It also may lead to government default causing turmoil in both the economy and finance.

Fiscal health can be measured by the ratio of debt to GDP. Although implicit liabilities may not be part of the normal debt statistics, they are a debt effectively because they are the government made spending promises.

Action Plan in BC

In British Columbia for example the government is aiming at reducing tax, supporting those who earn low income and protecting the people’s savings as a result of slowdown in the economy. This will be done through deferment of property tax payments for home owners with at least 15 % equity with another plan coming up for families that have children under the age of 18. This will include applied simple interest with non repayment of the deferred taxes till the homes are sold (British Columbia, 2010).

There are also low income taxes with low income earners not paying any income taxes at all. Some of them pay less with a decrease between 37 percent and 70 percent. In addition, tax credit of $105 and $31.50 are given to adults and children of low income earners respectively as support. For individuals earning of less than $20,000 credit of $ 230 will be offered. Other services will include new pension, additional options for seniors, savings security by insurance companies, rental help provided for seniors, small business and corporate income tax relief and rebate on industry tax (British Columbia, 2010).

References

British Columbia. (2010). B.C.’s Economic Plan to Support Families, Workers and Boost Productivity. Retrieved March 31, 2011, from British Columbia: http://www.gov.bc.ca/economic_plan/index.html

Krugman, P., Wells, R., & Myatt, A. (2006). Macroeconomics. New York: Worth.