Effectiveness of Fiscal policy
- Taxes and government spending adjust automatically to offset fluctuations in real GDP
- Has the potential to increase both AD and AS via spending and taxation
- It can take time for the policy implemented to have an effect on the economy, and it can also take a while to grab the data necessary for evaluating which policy is best
- Some forms of spending may be inflexible
- g. pensions or healthcare
- The policies need to be based on accurate information
- g. if a recession’s predicted, the government will implement expansionary fiscal policy; however, if a boom actually happens, inflation may occur, and the business cycle will continue, hence an unstable economy.
- Households and firms may act in unexpected ways
- g. if consumers lack confidence, tax cuts may not lead to higher consumption; underestimating the size of the multiplier effect may also cause this.
- Changes in other countries may also have big impacts, as if the UK is pursuing expansionary fiscal policies whilst others are experiencing a recession, AD in the UK may not rise by much.