Everyone says they want to see the budget cut, just not their portion of the budget. This also boosts demand and drives growth. This includes payments from Social Security, Medicare, Medicaid, Obamacare and interest payments on the national debt. [2] Some examples of areas funded by discretionary spending are national defense, foreign aid, education and transportation. The budget also contains mandatory spending. With this decreased demand, then, the economy’s growth is slowed. It includes taxes on workers' incomes, corporate profits, imports and other excise fees. Discretionary fiscal policy is a change in government spending or taxes. Contractionary fiscal policy slows growth, which includes job growth. These laws must be passed by both the Senate and the House of Representatives. During the expansion phase, Congress and the president should cut spending and programs to cool down the economy. An expansionary discretionary fiscal policy is typically used during a recession. At the same time, the Fed should enact contractionary monetary policy. A decrease in taxation will lead to people having more money and consuming more. Prateek Agarwal’s passion for economics began during his undergrad career at USC, where he studied economics and business. Along with tax cuts, growth is especially accelerated. Instead, politicians keep spending and cutting taxes regardless of where we are in the boom and bust cycle. All Rights Reserved. Since then he has researched the field extensively and has published over 200 articles. Supply-side economics says that a tax cut is the best ways to stimulate the economy. [3] After setting discretionary spending levels, both the House Appropriations Committee and Senate Appropriations Committee divide the agreed-upon amount of discretionary spending into twelve suballocations for each of their twelve subcommittees. Changes in the mandatory budget do not fall under the umbrella of discretionary fiscal policy because Congress has to vote to amend laws to alter these programs, and they are difficult to change. That then reduces job growth. Congress alone has the ability to alter the tax code by establishing new laws, passed by the Senate and the House of Representatives. Since, Aggregate Demand = Consumption + Investment + Government Spending + Net Exports, an expansionary policy will shift aggregate demand to the right. For example, look at the Greek debt crisis. Once passed, the president either signs them, vetoes them, or allows them to become law by not signing them within ten days. Unfortunately, democracy itself ensures an expansionary discretionary fiscal policy. When working together, fiscal and monetary policy control the business cycle. These automatic stabilizers take place when, during a recession, a government automatically spends more because the economy forces more people to claim unemployment benefits. Some examples of areas funded by discretionary spending are national defense, foreign aid, education and transportation.

That means it's up to the Fed alone to manage the business cycle. But the president has the power to change how tax laws are implemented. Contractionary policy is difficult to implement because no one wants cuts in spending. All other federal departments are part of discretionary spending too. Tax cuts are less effective in creating jobs, as the tax rate must already be high for lowering taxes to do so (the Laffer Curve is the economic theory describing this principle). For instance, when the UK government cut the VAT in 2009, this was intended to produce a boost in spending.

Only Congress has the power to change the tax code. Notably, democracy tends to lead to expansionary discretionary fiscal policy. In American public finance, discretionary spending is government spending implemented through an appropriations bill. If the economy is growing too fast, fiscal policy can apply the brakes by raising taxes or cutting spending. It is considered to be a short-term tool, not a long-term solution. No government or politician would implement a contractionary policy, so this means that expenditure will keep rising and taxes would probably not rise too. The Greek government-debt crisis, beginning in 2009 and lasting roughly a decade, as a result of this issue. This should also create an increase in aggregate demand and could lead to higher economic growth. Studies show that unemployment benefits are the best stimulus. This is because lawmakers campaign on the promise of government spending and lowering their constituents’ taxes. They are the budget process and the tax code. When Congress raises taxes, it also slows growth. They have more money to spend. It’s when the federal government increases spending or decreases taxes. They won’t be as eager to buy U.S. Treasurys or other sovereign debt. The following are common types of discretionary expense with examples of each.