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What Are the Different Types of Problems with Fiscal Policy?

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  • Written By: Alex Newth
  • Edited By: Angela B.
  • Last Modified Date: 16 September 2014
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Fiscal policy is a government's approach to budgetary issues, including spending, taxation and borrowing or loaning money to regulate the economy; while this seeks to balance the economy, there are some problems with fiscal policy. One of the most obvious problems with fiscal policy is that, to get more money, the government will typically increase taxes. Fiscal policy tends to increase interest rates, so exporting may go down. Unintended inflation is one of the problems with fiscal policy that can occur if people who already have jobs fill new positions created by government spending. Depending on how it is used, this policy also can make it difficult for private investors or businesses to borrow money.

Usually when a fiscal policy is initiated, a government uses tax money to fund spending to balance the economy. While this may not involve increasing taxes, either because the government does not need more money or it plans to spend less than the current tax revenue, the government more commonly needs more tax revenue to support spending. This increase in taxes usually leaves less money for people to use, so the fiscal policy may result in decreased public spending and demand.

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When a fiscal policy is used, interest rates tend to increase in proportion to the amount of government borrowing. This means the country’s money becomes more valuable, which is usually a good thing. The money increases in value, so exported items may cost more in foreign countries and regions. This tends to decrease exporting, which makes this one of the problems with fiscal policy that affects companies reliant on exporting.

Unintended inflation can be one of the problems with fiscal policy that can occur if proper hiring is not done. When the government is more active, this tends to increase the overall amount of jobs and positions. If unemployed people are given a job, then this usually helps the country or region. Inflation can occur if employed people are hired for these positions, because human resources are just shifting and labor demand increases, which increases prices and inflation.

Under a fiscal policy, the government may borrow money through increased bonds sales. This increases the general pool of money the government has and usually also increases the interest rates attached to bonds. The increased interest rates mean many investors will prefer to invest in government bonds rather than private investments. By leaving fewer resources for private establishments, they may find it difficult to continue operations.

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