Who Sets Fiscal Policy—the President or Congress?

Fiscal policy refers to actions taken by governments to help direct their economies. This is done through various measures, including taxation. There is not just one central body responsible for tax policy. In fact, both the president and the US Congress participate in it, which means that it is led by both the executive and legislative branches of the United States:

  • Within the executive, the two most influential positions in this regard belong to the President and the Treasury Secretary, although contemporary presidents often also rely on a council of economic advisers.
  • Within the legislative branch, the US Congress passes laws and allocates expenditures for any measure of fiscal policy. This process involves the participation, deliberation and approval of the House of Representatives and the Senate.

The so-called Taxation and Expenditure Clause of the US Constitution, Article I, Section 8, Clause 1, authorizes Congress to levy taxes. However, the Constitution actually specifies only two legitimate purposes of taxation: federal government debt and ensure the common defence.

Although it could be argued that the provisions of the article exclude the use of taxes for fiscal policy purposes, such as a bill on tax cuts to develop the economy, the macroeconomics suggests that any level of taxation has an impact on aggregate demand.

Key points to remember

  • In the United States, fiscal policy is directed by both the executive and legislative branches of government.
  • Within the executive, the president and the secretary of the treasury, often accompanied by economic advisers, direct tax policies.
  • Within the legislative branch, the US Congress passes laws and allocates expenditures for any measure of fiscal policy.
  • The judicial branch of government can influence fiscal policy by legitimizing, modifying or declaring unconstitutional certain measures taken by the executive or legislative branches.
  • Tight fiscal policy raises taxes and cuts government spending when the economy overheats, while expansionary fiscal policy does the opposite during downturns.

What is fiscal policy?

Fiscal policy is an economic strategy that uses a government’s taxing and spending powers to influence a country’s economy. Contemporary fiscal policy is largely based on the economic theories of John Maynard Keynes which rose to prominence in the 1930s. He developed many of his ideas in response to the Great Depression and proposed that governments could stabilize the business cycle and regulate economic production by adjusting spending and tax policies. By Keynesian economic theorypublic spending and tax cuts should stimulate:

  • Global demand
  • The level of consumption and investment in the economy
  • Contribute to reducing unemployment

It is commonly used in conjunction with monetary policy to help control the economy. Monetary policy is set by a central bank and focuses on interest rates and the money supply to slow or propel economic growth.

As noted above, the legislative and executive branches play a major role in shaping fiscal policy. But the judiciary – the Supreme Court and even lesser courts – can also have an impact on fiscal policy by legitimizing, modifying or declaring unconstitutional certain measures taken by the executive or the legislature to affect the national budget. economy.

The power to spend to encourage certain outcomes has generally been interpreted as constitutional since the South Dakota vs. Dole decision of the United States Supreme Court in 1987. In this case, the court upheld the constitutionality of a federal law that withheld federal funds for highways from states whose legal drinking age did not comply with federal policy (minimum drinking age of 21).

Restrictive or expansionary fiscal policy

The type of fiscal policies adopted by the executive and legislative branches depends on the evolution of the economy. They can adopt a restrictive or expansionist approach depending on the result they want to achieve.

  • Restrictive fiscal policy: These stocks are used when the economy is booming and needs to slow down so things don’t get out of control. When this happens, there is a good chance that the market bubbles, overconfidence and other economic obstacles that can lead to overheating. Fiscal policies are being used to curb all this growth by increasing Taxation and a reduction in public spending. Although it helps to control inflation, the restrictive fiscal policy increases the unemployment rate.
  • Expansionary fiscal policy: This type of fiscal policy is used when things get too slow, usually during a recessionand the government wants to fuel growth. government spending rises and tax rates fall. Unemployment is falling as jobs open up and more people re-enter the labor market. This policy helps put more money in people’s pockets so they can spend more.

Inflation can create major problems for the economy, which is why governments and economists watch it closely. They each use fiscal and monetary policies to fuel growth or to prevent the economy from overheating.

How fiscal policy is set

As we already mentioned in the previous section, expansionary fiscal policy in the United States has been pursued by a combination of spending public funds on politically attractive ends, such as infrastructure, job training, or anti-poverty programs. It is also a question of lowering taxes on all or part taxpayers.

Tax policies in the United States are normally tied to each year’s federal budget, which is proposed by the President and approved by Congress. This budget highlights the details of what to expect in the next fiscal year, which begins October 1. Here are the main priorities of the budget:

  • Provide Congress with a signal of the President’s fiscal policy for the year, including expenditures, and the amount of revenue expected to be collected from taxpayers. It also indicates whether the government intends to run under a deficit or one surplus and by how much.
  • To report priorities in the President’s federal programs, including the amount of planned spending on health, education, and defense.
  • Make tax and spending policy recommendations to Congress.

But there have been times when no budget has been proposed, making it harder for market participants to react and adapt to upcoming fiscal policy proposals.

Once the budget is approved, Congress then develops budget resolutions. These are used to set parameters for spending and tax policy. Once the resolutions are made, Congress begins the process of allocating funds from the budget to specific purposes. These credits bills must be signed by the president before they can be signed into law.

What role does the president play in fiscal policy?

The president has a major role in the country’s fiscal policy. As a member of the executive, the president makes plans when submitting the annual budget. This proposal indicates the amount of tax revenue the government intends to collect and the amount of planned public spending by portfolio, such as education, defense and health.

Is Congress involved in fiscal policy?

Congress has a big role to play in fiscal policy. It is one of the bodies that help shape the spending and fiscal policies of the country along with the executive branch. This branch of government is responsible for making budget resolutions once the president’s annual budget is approved.

What drives the President and Congress to adopt an expansionary fiscal policy?

Expansionary fiscal policy involves increased government spending and lower tax collection, perhaps through lower tax rates. Governments use expansionary fiscal policies when they want to fuel growth after a recession. Prices are rising and unemployment is falling. During this period, people have more money in their pockets and can spend more freely.

The essential

The authorities have a few tools at their disposal to help control the direction of the economy. Monetary policy is enacted by central banks like the US Federal Reserve, while fiscal policy is the responsibility of the government, namely the executive and legislative branches. This generally involves the use of public expenditure and taxation. The president submits an annual budget, which Congress uses to develop budget resolutions.

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