Essay on Macroeconomics: Fiscal Policy Options

2021-07-12 21:30:37
3 pages
773 words
University of California, Santa Barbara
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Unemployment is known to have negative impacts on the governments ability to generate more income, and it also reduces economic activities (Riley, n.d.). High unemployment rates indicate that few people pay taxes to the government and spending on goods and services is also low making it difficult for businesses to thrive. There are two methods which can be applied to help reduce the unemployment rates, by either increasing the governments expenditure on goods or reducing taxes (Riley, n.d.). Both methods, however, have its own advantages and disadvantages.

Taxation is one of the primary fiscal policy tools that the government can use to curb unemployment. When taxes are high, it indicates that the consumers have less disposable income hence resulting to less consumption. the ripple effect is that when customers spend less on consumer goods, the business will generate less revenue (Coady & Gupta, 2012). This implies that it is likely to hire very few individuals or can sometimes layout workers to reduce costs. Reducing taxes is one way the government can employ to reduce unemployment, because it places more money in the hands of the customer, hence leading to increased revenues that allow businesses to expand implying that they would hire more people in the process (Coady & Gupta, 2012).

Government spending is also another method that can be used to curb unemployment, and this can be done when government funs public programs and projects such as building suitable infrastructure to facilitate trade and business growth. Through the availability of good infrastructure, jobs are created in the various sectors, hence increasing disposable income and spending among the citizens (Coady & Gupta, 2012). If the programs encourage overall growth in the economy, the private sector will hire more people after these projects are complete. However, government spending may appear fulfilling, but they do not create sustainable measures for combating unemployment. The government must allow the private sector to invest, and thus fulfill infrastructural development and encourage spending (Coady & Gupta, 2012).

There are however considerations in both cases. First, increasing government spending and lowering taxes increases government debt, and lower taxes implies that the government will take in lower revenues while spending more (Coady & Gupta, 2012). This creates a deficit, and accumulation of deficits increases debt load. On the other hand, increased government spending increases demand for goods and services, and tax cuts increase disposable income that increases consumption of goods and services and investing (Coady & Gupta, 2012).

The government has to weigh the two options and establish the best strategy to handle the unemployment situation without in itself, hurting other economic sectors. Depending on the economic growth, both options can be applicable (Riley, n.d.). However, reduced taxation has proved to be more feasible, because it increases demand in the economy. Four factors increase demand with tax cuts. First, customer spending is increased because customers get a larger share of income. Second, lowering taxes implies that firms will have more capital to invest in ventures that will facilitate growth further, as a result of increased demand for goods and services (Riley, n.d.). Third, tax reduction encourages a balance of trade, because companies will be incentivized better to keep their funds within their home country other than moving it to foreign countries. Lower taxes also encourage foreign investment in a country, compared to when they are relatively higher, hence allowing more funds to be invested and also spent within the local economy (Riley, n.d.).

Tax breaks s also issued by the government in particular industries to ensure survival in the economy. Of particular concern is when a given industry hires a majority of people, and it is on the verge of collapsing (Coady & Gupta, 2012). It should, however, be noted that when issuing tax breaks, the Canadian government should apply scrutiny through consideration of the potential economic yield and risks at all levels. Segregation could be an important tool to be applied, but it should not be used as a basis for scrutiny in a given industry (Coady & Gupta, 2012).

Apart from tax reductions and government spending, innovative strategies for reducing unemployment include investing in technology that can help create jobs, particularly in areas such as green economy and clean energy generation (Coady & Gupta, 2012). In addition, the current education instructional strategies have to be replaced with modern tools that boost, creativity and innovation among learners that would then help them view the world in wider perspective.



Coady, D., & Gupta, M. S. (2012). Income Inequality and Fiscal Policy. International Monetary Fund.

Riley, G. (n.d.). Unemployment - Policies to Reduce Unemployment. Retrieved November 16, 2017, from


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