Course : 0062J

Perekonomian Indonesia

Fiscal Policy and Government Expenditure

Week 5
 Fiscal Policy

● fiscal policy
Changes in government taxes and
spending that affect the level of
GDP.
 Terms in Chapter 24 (Case, Fair, Oster, 2012)

Fiscal policy refers to the government’s decisions about

how much to tax and spend. The federal government
collects taxes from households and firms and spends those
funds on goods and services ranging from missiles to parks
to Social Security payments to interstate highways.
Taxes take the form of personal income taxes, Social
Security taxes, and corporate profits taxes, among others.
An expansionary fiscal policy is a policy in which taxes are
cut and/or government spending increases.
A contractionary fiscal policy is the reverse.
 FIGURE 24.1 : Adding Net Taxes (T ) and Government
Purchases (G) to the Circular Flow of Income, Chapter 24, Case, Fair,
Oster, 2012
 Terms in Chapter 24 (Case, Fair, Oster, 2012)

• Discretionary fiscal policy Changes in taxes or

spending that are the result of deliberatechanges
in government policy.
• Net taxes (T ) Taxes paid by firms and households
to thegovernment minus transfer payments
made to households by the government.
• Disposable, or after-tax, income (Yd) Total
income minus net taxes: (Yd = Y – T).
Discretionary Nondiscretionary
Fiscal Policy Fiscal Policy
(Unempl. Check)
• Deliberate use of
government spending Automatic Stabilizers
and/or taxing. 1. Welfare & food stamps
2. Unemploy. insurance
3. Social security
• “G” and “T” 4. Corporate Dividends
5. Progressive Tax System
 The Role Of Fiscal Policy
Fiscal Policy and Aggregate Demand

Panel A shows that an increase in government spending shifts the aggregate demand curve from
AD0 to AD1, restoring the economy to full employment. This is an example of expansionary policy.
Panel B shows that an increase in taxes shifts the aggregate demand curve to the left, from AD 0 to
AD1, restoring the economy to full employment. This is an example of contractionary policy.
 Fiscal Policy
[Automatic stabilizers]
Suppose the economy is in recession:
Tax
Real GDP collections
Transfer
AS payments
AD1
AD2
PL
G>T
YR Y*
“Recession”
The deficit grows
 Fiscal Policy
[Automatic stabilizers]
If the economy has an inflationary gap:
Tax
Real GDP collections
AS Transfer
AD2
PL AD1 payments

Y* YI
“Inflationary Gap”
G<T
The surplus grows
 Discretionary [“Active”] Fiscal
Policy [“G” & “T”]
Contractionary Fiscal Policy
Peak 1. Decrease “G”
Peak 2. Increase “T”
Peak Peak
AS
AD1 AD2
AD3
Trough PL2
Trough E
PL1
[Takes about 1/3 to ½ out of the curves] PL3

YR YF YI
Expansionary Fiscal Policy
1. Increase “G”
2. Decrease “T”
 Example : Federal Personal Income Taxes as a
,
Percentage of Taxable Income, 1993 I–2010 Chapter
24 (Case, Fair, Oster, 2012)
 FIGURE 24.5 Federal Government Consumption
Expenditures as a Percentage of GDP and Federal
Transfer Payments and Grants-in-Aid as a Percentage of
GDP, 1993 I–2010 I, Chapter 24 (Case, Fair, Oster, 2012)
FIGURE 24.6 The Federal Government Surplus (+) or
Deficit (–) as a Percentage of GDP, 1993 I–2010
IChapter 24 (Case, Fair, Oster, 2012)
 Tax Revenue and GDP of Indonesia 2001 – 2010
(World Bank)

Megawati SBY
Administrations Administrations
 Central Government Total Debt 2002 – 2010 (World
Bank)

SBY
Administrations

Megawati
Administrations
 BJ. Habibie SBY
AdministrationsAdministrations
Megawati
Administrations

Gusdur
Administrations
Soeharto
Administrations
Soeharto
Administrations

Megawati
Administrations
Gusdur
Administrations
BJ. Habibie SBY
Administrations Administrations
Thank You