Fiscal Fine tuning and Discretionary Fiscal Policies explained with examples.
There are two approaches to the use of fiscal policies and they are;
1) Fiscal Fine tuning
2) Discretionary Fiscal Policies
What is Fiscal Fine tuning?
This involves the use of fiscal policies to remove even minor fluctuations on National Income around its full employment level. This implies that only minor fiscal changes should be introduced and this should be done regularly to ensure that National Income is held at the full employment level.
It was favored by the Keynesian Economists in the 1900’s. It is believed that Fiscal policies itself adjust automatically to the ever changing economic environment through some inbuilt automatic stabilizers.
An automatic stabilizer is defined as any mechanism which helps to reduce the magnitude of fluctuations in National Income occasioned by exogenous changed in such expenditures. For instance, investment, consumption, e.t.c.
The two. common automatic stabilizers are;
a)Income tax
b)Government transfer payments
The income tax acts as an automatic stabilizer in the sense that under a progressive tax system, increases in the National Income will automatically lead to increases in the tax. Therefore, the increase in the tax due to the increase in income will help to reduce aggregate spending and hence remove the fluctuations in National Income.
What are Discretionary Fiscal Policies?
These are conscious effort by the government to remove a notable gap. between the actual and the full employment level of income through the deliberate use of fiscal instrument.
This approach presupposes that not all short term minor fluctuations in National Income can be removed by automatic stabilizers.
There maybe more pronounced and persistent gaps between actual and potential full employment level of income.
A gap is the difference between Aggregate Supply (National Output) and Aggregate Demand.
A discretionary approach to Fiscal policy will involve setting up an institution whose primary responsibility is to periodically review changes in government expenditure (spending), alter fiscal policies on order to bring about the macro-economic objectives.
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