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What Are the Different Methods of Fiscal Policy Analysis?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 21 November 2016
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Fiscal policy analysis is an activity that helps individuals assess how well a government engages in policy efforts. Many different types of analysis are possible, with the most common involving the use of economic indicators, a review of tax policy, and revenue forecasting or a study on how a government spends its funds. Economists, watchdog groups, policy makers, or government budget groups can all engage in fiscal policy analysis. Including a number of individuals or groups can be good and bad for policy analysis. While the government will get several opinions on fiscal policy, arguments can erupt about how to study or assess the numbers.

Economic indicators are quarterly or annual computations that measure the effect of different activities in an economy. Fiscal policy analysis may use these indicators to assess how an activity performed after the government allocated money to it. For example, a welfare system most often has the goal of improving the livelihood of individuals at the bottom of the economy in terms of income. Economic indicators can provide answers on how many individuals received welfare and if they were able to improve their livelihoods. Other systems or programs offered through fiscal policy may undergo similar reviews.

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Tax policy and revenue forecasting are perhaps the two biggest issues studied under fiscal policy analysis. Tax policy represents the structure whereby a government intends to impose taxes on its citizens. Government agencies can create any number of tax authorities or rules that citizens must follow in order to report taxes to the government. In most cases, individuals and businesses face two different sets of tax policy, one for each group. Tax policy eventually leads to revenue forecasts for the government.

Revenue forecasting in fiscal policy analysis determines the amount of income a government will incur due to its tax policy. Governments look to these figures so they know the amount of funds that can be spent on certain government-inspired activities. Of course, irresponsible governments do not care about the revenues they will receive. They simply spend money hand over fist on activities. In most cases, however, the government needs to know the amount of revenue collections for future adjustments to the tax policy.

Government spending is another common goal of fiscal policy analysis. The effectiveness and efficiency of government funds is necessary to determine if the money is well spent. If not, the government needs to alter its spending habits. Watchdog groups and other external groups may be the most effective in reviewing this portion of fiscal policy.

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