Fiscal Policy: Economic Effects

Fiscal Policy: Economic Effects.  Congressional Research Service. Jeffrey M. Stupak. May 16, 2019

Fiscal policy is the means by which the government adjusts its spending and revenue to influence the broader economy. By adjusting its level of spending and tax revenue, the government can affect the economy by either increasing or decreasing economic activity in the short term. For example, when the government runs a budget deficit, it is said to be engaging in fiscal stimulus, spurring economic activity, and when the government runs a budget surplus, it is said to be engaging in a fiscal contraction, slowing economic activity. 

In recent history, the federal government has generally followed a pattern of increasing fiscal stimulus during a recession, then decreasing fiscal stimulus during the economic recovery. Prior to the “Great Recession” of 20072009 the federal budget deficit was about 1% of gross domestic product (GDP) in 2007. During the recession, the budget deficit grew to nearly 10% of GDP in part due to additional fiscal stimulus applied to the economy. The budget deficit began shrinking in 2010, falling to about 2% of GDP by 2015. In contrast to the typical pattern of fiscal policy, the budget deficit began growing again in 2016, rising to nearly 4% of GDP in 2018 despite relatively strong economic conditions. This change in fiscal policy is notable, as expanding fiscal stimulus when the economy is not depressed can result in rising interest rates, a growing trade deficit, and accelerating inflation. As of publication of this report, interest rates have not risen discernibly and are still near historic lows, and inflation rates show no sign of acceleration. The trade deficit has been growing in recent years; however, it is not clear that this growth in the trade deficit is a result of increased fiscal stimulus.

[PDF format, 14 pages].

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Partners or Pirates? Collaboration and Competition in Local Economic Development

Partners or Pirates? Collaboration and Competition in Local Economic Development. Urban Institute. Megan Randall et al. December 20, 2018

In this report, the authors explore how and why local governments have turned to cooperation to boost economic development. They synthesize highlights from the literature, explore program features from two regional case studies, and share findings from interviews with local practitioners. Although research on the effectiveness of current practices is limited, they identify themes that can inform cooperative economic development. [Note: contains copyrighted material].

[PDF format, 67 pages].

Evaluating Tax Expenditures: Introducing Oversight into Spending through the Tax Code

Evaluating Tax Expenditures: Introducing Oversight into Spending through the Tax Code. Urban Institute. Benjamin H. Harris, C. Eugene Steuerle, Caleb Quakenbush. July 10, 2018

 Increased demand for better use of evidence in policymaking has sparked bipartisan support for better evaluation of federal spending programs. Tax expenditures, spending-like subsidies embedded in the tax code, cost taxpayers roughly as much as domestic discretionary programs, yet receive little-to-no scrutiny from government evaluators. Many large tax expenditures have existed for decades with limited reform, despite independent research often finding them to be inefficient at achieving their purported goals. After a brief overview of tax expenditures, we review the evaluative tools and offices government has at its disposal and suggest options lawmakers could use to conduct regular evaluation of tax subsidies in pursuit of leaner, more effective government. [Note: contains copyrighted material].

 [PDF format, 20 pages].

The Search for a Euro Area Safe Asset

The Search for a Euro Area Safe Asset. Peterson Institute for International Economics. Álvaro Leandro and Jeromin Zettelmeyer.  Working Paper 18-3. March 2018

 This paper evaluates four approaches to creating “safe assets” or asset portfolios for the euro area: (1) a diversified portfolio of senior tranches of sovereign debt (“national tranching”); (2) a senior security backed by a diversified pool of national sovereign debt (“ESBies”); (3) debt issued by a senior financial intermediary, backed by a diversified pool of national debt (“E-bonds”); and (4) debt issued by a euro area budget or a leveraged wealth fund, based on member state contributions or dedicated direct revenue sources. None of these approaches envisages explicit guarantees by member states, and all could potentially produce safe assets in sufficient quantities to replace euro area sovereign bond holdings in euro area banks. At the same time, the four approaches differ across several important dimensions. A euro area budget or wealth fund could create the largest volume of safe assets, followed by ESBies, E-bonds, and national tranching. A euro area budget or wealth fund is also likely to have the lowest impact on the structure and liquidity of national bond markets, while national tranching would have the largest impact. ESBies and E-bonds occupy an intermediate position. ESBies and potentially bonds issued by a euro area budget would offer their holders greater protection from deep national defaults than the other two proposals. Both ESBies and national tranching would avoid cross-country redistribution by construction, whereas E-bonds and a euro area budget could have significant distributional consequences, depending on their design. E-bonds are unique in that they would raise the marginal cost of sovereign debt issuance at higher levels of debt, thereby exerting fiscal discipline, without necessarily raising average debt costs for lower-rated borrowers. [Note: contains copyrighted material].

 [PDF format, 68 pages].

Earmarked Revenues: How the European Union Can Learn from US Budgeting Experience

Earmarked Revenues: How the European Union Can Learn from US Budgeting Experience. Peterson Institute for International Economics. Policy Brief, 18-2. Jacob Funk Kirkegaard. January 2018

 New challenges facing the European Union—immigration pressures, the need to decrease security dependence on an increasingly erratic United States, and the United Kingdom’s exit from the European Union (Brexit)—are compelling EU leaders to consider overhauling the revenue side of the European Union’s existing budget. To deal with these challenges in the future, the European Union will need resources—at a time when Europeans are increasingly skeptical about the effectiveness of budget-making in Brussels. Longstanding US budgetary procedures of trust fund accounting and earmarking government revenue towards specific priorities can provide a template for European policymakers. Shifting the EU budget towards more earmarked resources would reduce distrust among taxpayers by limiting Brussels’ spending discretion while focusing expenditures on specific challenges facing the European project. [Note: contains copyrighted material].

 [PDF format, 15 pages].

A Primer on Disaster and Emergency Appropriations

A Primer on Disaster and Emergency Appropriations. The Heritage Foundation. Justin Bogie. March 2, 2016.

Each year, Congress appropriates billions of dollars in discretionary funding for disaster relief and emergencies. Some of that funding is provided through base appropriations measures, but a much larger portion is provided through annual Budget Control Act (BCA) cap adjustments that increase discretionary spending by billions of dollars, or by supplemental appropriations bills that provide even greater amounts of funding that is not subject to spending caps or budgetary controls. The paper outlines the three classifications of disaster and emergency spending and discusses the importance of paying for these events within the normal annual appropriations except in the cases of true emergencies. [Note: contains copyrighted material].

[PDF format, 3 pages, 121.36 KB].

Defense Modernization Plans through the 2020s

Defense Modernization Plans through the 2020s. Center for Strategic & International Studies. Todd Harrison. January 26, 2016.

Since the enactment of the Budget Control Act (BCA) of 2011, much attention has been paid to the near-term effects of budgetary constraints on national defense. What has received less attention are the looming budgetary challenges defense faces beyond the BCA budget caps and the Defense Department’s five-year budget planning horizon. The report details the plans for major acquisition programs over the next fifteen years and explores the complicating factors that may make the situation more problematic for policymakers. [Note: contains copyrighted material].

[PDF format, 42 pages, 2.12 MB].