The Purpose of an Expansionary Fiscal Policy

Expansionary fiscal policy is a response to market instability.

Expansionary fiscal policy is an economic policy of government spending that aims to stimulate the economy even in the event of a budget deficit. The philosophical standpoint behind expansionary fiscal policy is the idea that it is the duty of government to take an active role in the national economy, particularly in times of recession, to dampen the negative impact and shorten the length of the recession itself. The concept of stimulus spending stems from the idea that putting money from the government coffer back into the national economy will serve as a catalyst toward rebuilding the lost aggregate demand behind the recession.

1 Definition

Expansionary fiscal policy summarizes down to the basic concept of governmental stimulus spending during an economic downturn. Given that during economic downturns tax revenues are also likely to suffer, the result is ultimately a budget deficit. An expansionary fiscal policy is essentially when the government spends beyond its means on a short-term basis with the ultimate goal of minimizing or averting a financial crisis. The New Deal economic stimulus program employed during the Roosevelt administration is an early example of expansionary fiscal policy. In more recent years, both the George W. Bush and Obama administrations attempted some measure of stimulus spending that could be described as expansionary fiscal policy.

2 Pros

Proponents of expansion and fiscal policy make the case that in times of economic turmoil, the government should become involved in an attempt to mitigate the damage in the interest of the common good for citizens. Theoretically, the advantages to an expansionary fiscal policy are that the length and severity of recessions and depressions are lessened. Unfortunately, tracking whether those theories are effective is difficult because it's impossible to know exactly how long a recession or depression would otherwise have continued due to the myriad of highly complex variables. Those who support expansionary fiscal policy ultimately ask that supporters have faith in the long-term wisdom of stimulus spending. The actual effectiveness of stimulus spending varies, since each administration comes up with its own spending priorities. One of the most important positive aspects of expansionary fiscal policies is that they can act as a short-term Band-Aid solution for keeping a troubled economy on its feet.

3 Cons

The cons of expansionary fiscal policy are generally more easily understood by the general populace because they easily parallel many of the drawbacks of overspending within the personal financial realm. In essence, expansionary fiscal policy involves spending money that the government doesn't have, or put another way, borrowing against the future strength of the country. Some of the major drawbacks of expansionary fiscal policy become apparent when an expansionary fiscal policy is retained for a long period of time, ultimately leading to an unmanageably high national debt. Eventually, the national debt reaches a point where it hits the theoretical borrowing limit, which can spark a financial crisis in its own right.

4 Economic Role of Government

The debate on expansionary fiscal policy ultimately boils down to deciding what the role of government should be regarding the economy. Proponents of expansionary fiscal policies say that the government should take an active role in maintaining the fiscal health of the nation even though it costs taxpayers in the long term. Those against expansionary fiscal policy say that the market should be allowed to run its course naturally and that government should focus on matters of absolute necessity, such as civil defense and lawmaking. Ultimately, it isn't for politicians to decide; it is up to the citizens to decide through staying current on economic issues and informed voting.

Daniel R. Mueller is a Canadian who has been writing professionally since 2003. Mueller's writing draws on his extensive experience in the private security field. He also has a professional background in the information-technology industry as a support technician. Much of Mueller's writing has focused on the subjects of business and economics.