Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697751333867.pdf (Ireland)
Tithe an Oireachtais Houses of the Oireachtas An Oifig Buiséid Pharlaiminteach Parliamentary Budget Office Introduction to the Irish economy: Fiscal Policy This note will cover the following: • • • • Fiscal policy Expansionary fiscal policy Contractionary fiscal policy Automatic stabilisers What is fiscal policy?

Fiscal policy refers to the government’s choices when adjusting its tax and spending policies.
Monetary policy is a set of tools the central bank uses to control the overall money supply, e.g., higher interest rates.

Both monetary and fiscal policies are used to regulate economic activity over time.

Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty1.

If the economy is struggling, the government can increase the amount of money it spends to create economic activity, this is referred to as stimulus spending.
If there are not enough government income to pay for increased spending, the government may borrow money by issuing debt securities (e.g., bonds).

This process requires accumulating debt and is referred to as deficit spending.

A fiscal policy response ultimately depends on four things: 1.

2.

Fiscal space2 – the government has resources for new spending initiatives or tax cuts.

Issue debt – The government may sell debt (e.g., bonds) and fund projects through their sale.

3. programmes.
3. programmes.

Reallocate existing resources – The government changes existing spending to fund new polices or 4.

Raise or lower taxes e.g.

reduced VAT rate Expansionary Fiscal Policy: Expansionary fiscal policy is designed to encourage economic growth.

The basic objective of expansionary policy is to boost aggregate demand,3 and increase business investment and consumer spending by introducing more money into the economy.
The government can increase spending during expansionary periods to boost demand and stimulate economic growth.

The government can also reduce taxes to put more money in consumers’ pockets and encourage spending.

Governments can also increase household income by increasing transfer payments such as welfare, unemployment, or other benefits.
IMF (2023) Governments use spending and taxing powers to promote stable and sustainable growth 1 2 Fiscal space is the room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its fiscal position or the stability of the economy.

3 Aggregate Demand: is total amount of demand for all goods and services produced in an economy.
PBO Publication 16 of 2023 ParliamentaryBudgetOfficeQuarPBO Publication 11 of 2019IntroductionThe Medium-Term Expenditure Framework is a set of administratve procedures employed for the management of Voted Current Expenditure over the medium term by way of three-year ceilings.

The legal basis for these ceilings is set out by the Ministers and Secretaries (Amendment) Act 2013 (the Act).
These ceilings were first introducedon an administrativebasisin 2012, under the Comprehensive ExpenditureReport 2012-2014, and were subsequently place on a legal and procedural footing.

Ceilings are set out in each Budget for the following three years (e.g.

Budget 2019 includes ceilings for 2019, 2020 and 2021).

These ceilings cover Voted Expenditure in addition to the National Training Fund ) and the Social Insurance Fund.
The ceilings are set at an aggregate level, and also at Ministerial Vote Group level.Capital and Current ExpenditureSince 2014, ceilings have been given for both capital and current expenditure in the Budget.

However, the processfor setting these ceilings is different.The capital expenditureceiling is mostly set and modified as part of the National Development Plan.
Meaning that while the proportional growth in capital expenditure ceilings is very large, changes to capital ceiling tend to be the result of conscious decisions and central planning for the level of capital invest to be made in the coming years.

However, as Figure 2 shows, the relationship is inverted when absolute values are used.

The absolute value of revisions in current expenditureceilings is significantly largerthan those for capital.
Tithe an Oireachtais Houses of the Oireachtas An Oifig Buiséid Pharlaiminteach Parliamentary Budget Office Contractionary fiscal policy: Contractionary fiscal policy is the opposite of expansionary policy.

In this case, the government either cuts spending or raises taxes.

This reduces the amount of money available for businesses and consumers to spend.

Policymakers take this action when the economy is perceived to be overheating and needs to cool down.
A government may also cut spending or raise taxes to combat rising inflation.

It should be noted, a government may be forced to contract fiscal policy if there is a fall in government resources to fund spending, such as in a recession.

Automatic stabilisers: Automatic stabilisers are mechanisms built into government budgets, with a change in policy, that increase spending or decrease taxes when the economy slows.

Automatic stabilisers act to offset fluctuations in a country’s economic cycle.
They are called this because they stabilise economic cycles and are automatically triggered without additional government action.

Automatic stabilisers are a type of fiscal policy designed to offset fluctuations in the business cycle e.g.

increased unemployment payments when employment falls4.

Ireland’s membership of the EU comes with some fiscal rules5, many of which are set out in the Stability and Growth Pact6 and the Fiscal Compact7.
These rules include aiming for a government debt-to-GDP ratio of below 60% and limiting the size of the deficit that any government can run per year to 3% of GDP8.

These rules directly impact the level of fiscal policy the government can take during an economic cycle.

It should be noted that these fiscal rules were suspended to help countries deal with the Covid-19 pandemic and there is ongoing discussion about proposed changes to the rules9.
Investopedia (2023) Expansionary Fiscal Policy: Risks and Examples 4 5 These fiscal rules are a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates.

Fiscal policy is the change in government spending or tax brackets.
6 The Stability and Growth Pact only applies to EU countries 7 The Fiscal Compact only applies to the Eurozone and certain other EU countries which have opted in 8 Parliamentary Budget Office (2023) PBO Note on Proposed new EU Fiscal Rules (EU Economic Governance Framework) 9 Ibid PBO@oireachtas.ie www.oireachtas.ie/pbo 02 February 2023 Disclaimer: This document has been prepared by the Parliamentary Budget Office (PBO) for use by the Members of the Houses of the Oireachtas and to aid them in their parliamentary duties.
It is not intended to be comprehensive or definitive.

The PBO may remove, vary or amend any information contained therein at any time without prior notice.

The PBO accepts no responsibility for any references or links to, or the content of, any information maintained by third parties.
ParliamentaryBudgetOfficeQuarPBO Publication 11 of 2019IntroductionThe Medium-Term Expenditure Framework is a set of administratve procedures employed for the management of Voted Current Expenditure over the medium term by way of three-year ceilings.

The legal basis for these ceilings is set out by the Ministers and Secretaries (Amendment) Act 2013 (the Act).
These ceilings were first introducedon an administrativebasisin 2012, under the Comprehensive ExpenditureReport 2012-2014, and were subsequently place on a legal and procedural footing.

Ceilings are set out in each Budget for the following three years (e.g.

Budget 2019 includes ceilings for 2019, 2020 and 2021).

These ceilings cover Voted Expenditure in addition to the National Training Fund ) and the Social Insurance Fund.
The ceilings are set at an aggregate level, and also at Ministerial Vote Group level.Capital and Current ExpenditureSince 2014, ceilings have been given for both capital and current expenditure in the Budget.

However, the processfor setting these ceilings is different.The capital expenditureceiling is mostly set and modified as part of the National Development Plan.
Meaning that while the proportional growth in capital expenditure ceilings is very large, changes to capital ceiling tend to be the result of conscious decisions and central planning for the level of capital invest to be made in the coming years.

However, as Figure 2 shows, the relationship is inverted when absolute values are used.

The absolute value of revisions in current expenditureceilings is significantly largerthan those for capital.