ACCA FM Syllabus B. Financial Management Environment - Fiscal Policy - Notes ^{2 / 6}

Discussion:

• By changing tax laws, the government can alter the amount of disposable income available to its taxpayers. If taxes increased consumers would have less money to spend.

  This difference in disposable income would go to the government instead of going to consumers, who would pass the money onto companies.

• Or, the government could increase its spending by purchasing goods from companies. This would increase the flow of money through the economy and would eventually increase the disposable income available to consumers.

  Unfortunately, this process takes time, as the money needs to wind its way through the economy, creating a significant lag between the implementation of fiscal policy and its effect on the economy.

• Governments can borrow: 

  • Short-term, e.g. Treasury bills
  • Long-term, e.g. National Savings certificates.

  This can have bad effects on the economy by ‘crowding out’ private investment by pushing up interest rates

  BUT: government spending can also boost the economy