Explain the five problems, criticisms, or complications that arise in the implementation of fiscal policy.

Question

What will be an ideal response?

Answer 1

First there is a timing problem. Three lags are identified under the “timing problem” category. There is a lag in recognizing the phase of the business cycle; there is an administrative lag in deciding which policies to follow; there is an operational lag in terms of the impact of the policy once it is implemented.
Second, there are political considerations in the adoption of fiscal policy. There is some evidence of a political business cycle where particular expansionary policies are followed in election years whether or not economic conditions merit them.
Third, there is an expectations complication. If businesses and households expect that the fiscal policy will be reversed in the future, they may not change their behavior in the way that would be expected if the fiscal policy was permanent.
Fourth, the taxing and spending decisions of state and local governments may counteract or reduce the effectiveness of fiscal policy decisions at the federal level. The U.S. government may enact an expansionary fiscal policy by increasing its budget deficit, but state and local governments often have to balance a budget and economic conditions may force them to adopt a contraction policy that partially offset what the federal government is seeking to achieve.
Fifth, there is concern about possible offsetting effects of government borrowing crowding out private spending that would occur in the absence of the government deficit.