EVALUATING FISCAL POLICY EFFORTS AND STABILIZING FACTORS

Abstract 

In the last 25 years, many developed and developing countries have adopted financial rules in order to eliminate or limit the budget deficit, reduce public debt and thereby improve the quality of fiscal policy. Fiscal rules are one of the basic tools of ensuring fiscal discipline and macroeconomic stability (Karakurt and Akdemir, 2010). Fiscal policy, which refers to the use of government spending and tax policies to influence macroeconomic conditions such as total demand for goods and services, employment, inflation and economic growth, is based on the ideas of John Maynard Keynes. Thus, a government can use an expansionary fiscal policy by lowering tax rates to increase aggregate demand and increase economic growth during the recession. Additionally, it may follow a contractionary fiscal policy in the face of rising inflation and other expansionary symptoms. 

In this study, the importance of achieving permanent improvement in economic growth and financial balance and thus reducing the fragility of the economy was emphasized by mentioning the efforts of fiscal policy. Some methods have been proposed for tax policies to contribute to macroeconomic stability. These methods can be listed as lowering tax rates to spread taxes to the bottom of the society, increasing the rate of direct taxes compared to indirect taxes to make tax policies fair, giving up tax amnesties that have become chronic in order to break expectations about tax amnesty, and making auditing and surveillance more effective. 

Keywords: Fiscal Policy, Tax Policies, Economic Stability, Expansionary Fiscal Policy, Contractionary Fiscal Policy 

INTRODUCTION 

John Maynard Keynes is a British economist who started a new trend in the economy. He is known for his defense of interventionist monetary and fiscal policies in the fight against economic recession. These thoughts were later embodied in the Keynesian economy. Finance or Public Finance, on which Keynes elaborates, represents the branch of science that examines the financial activities of the state and investigates the causes and consequences of these activities. Public finance examines the effects of government revenues and expenditures on economic activities. The emergence of Finance as a science can be considered new in terms of human history. "Finance", which emerged due to the developments in Europe in the 17th and 18th centuries, became a discipline that includes economy and law, especially with the economic crisis of 1929. The notion of the lack of state intervention in the markets in classical liberal policies has lost its effectiveness especially due to the economic crisis experienced in 1929 and the idea that economic problems should be solved with fiscal policies. These events increased the importance of the science of finance. Thereby, it can be said that the state's intervention in the economy through fiscal policy was intensified especially with the birth of Keynesian economics in the 1930s (Günaydın and Eser, 2009). The basic definition of finance reveals that public finance concerns fiscal legislation and financial management principles and public sources of income, covers public expenditures, budget, financial institutions, state goods, taxation and government borrowing. Among the objectives of public finance, positive factors such as ensuring efficiency in resource allocation, ensuring economic development, regulation function, and ensuring economic stability can be counted. Looking at all these, it is appropriate to define the following for fiscal policies. "Fiscal policies are policies implemented by the state to ensure that the economy reaches full employment, minimizes economic fluctuations, and creates a fair wealth and income distribution by using fiscal policy tools (such as public expenditures, taxes)." Fiscal policy forms the economic policy together with the monetary policy. While the tools of monetary policy are interest rate and money supply, it can be said that fiscal policy is carried out over public revenues (eg taxes and fees) and public expenses. However, public borrowing is also among the fiscal policy instruments. Fiscal policy, as stated earlier, is largely based on the ideas of British economist John Maynard Keynes, who argues that economic recessions are due to a shortage of total demand in consumption expenditures and business investment components. Keynes believed that governments could balance the business cycle and regulate economic output by adjusting spending and tax policies to address the shortcomings of the private sector. His theories were developed in response to the Great Depression, which challenged the assumptions of classical economics that economic changes were self-correcting. It can be understood by looking at the results of the Great Depression that Keynes' ideas are so effective in macroeconomic terms. Because the Great Depression hit the most industrialized cities and the effects of the crisis on the industrialized countries were almost the same. Decrease in stock price indexes (between 40-60%), raw material prices hit bottom (around 50%), decline in securities prices and stock market (around 30-40%), decrease in world industrial production (between 35-45%), there was an increase in unemployment (50 million unemployed), decrease in trade (55-80%) and the increase in bankruptcies. Construction activities have stopped in many countries affected by this crisis that created an army of unemployed and homeless in the cities; The 40-60% decrease in agricultural product prices adversely affected farmers and the rural population. Although the 1929 crisis was mainly attributed to the collapse of the stock market in the USA; When we look at the economic conditions, the size and impact of the crisis in those years, it is clearly seen that it deserves to be named as the Great World Crisis. Because the Great Depression caused 50 million people in the world to become unemployed, the total production on earth decreased by 42% and the world trade by 65%. Considering the other crises occurring in the world, it can be estimated how effective the 1929 crisis was, considering that world trade decreased by 7% at most. During this process, some 4,000 banks collapsed and because thousands of people did not have any assets, people affected by the crisis were starved and tried to live by growing and selling vegetables and fruits. Since the money in the market was suddenly disappeared, people had to go for a barter to meet their needs and somehow returned to a barter economy. Along with their material assets, people have lost their social status and mental health. The effects of the crisis continued for about ten years until World War II. According to Keynesian economics, the performance of total demand or spending economy and economic growth should be promoted. Total demand consists of consumer spending, commercial investment spending, net government spending and net exports. According to Keynesian economists, private sector components of total demand are very variable and depend on psychological and emotional factors to sustain sustainable growth in the economy. Pessimism, fear, uncertainty between consumers and businesses can lead to economic stagnation and crisis. Excessive enthusiasm in good times can overheat the economy and lead to inflation. However, according to Keynesian Economics, the taxation policies and expenditures of the state can be managed rationally and used to eliminate the excess or deficiencies of consumption and investment expenditures to stabilize the economy. When spending declines, the government can lower taxes to directly increase aggregate demand and economic growth. The market is optimistic, the consumption is too high, or spending too much and too quickly on new investment projects can cause the government to charge more taxes to reduce total demand. All these steps are known as expansionary or contractionary fiscal policies, respectively. Disclosure of contractionary and expansionary fiscal policies and addressing balancing factors, especially in tax policies, are important for developing methods to contribute to macroeconomic stability. 

1-) Contractionary Fiscal Policy 

Developing countries seeking solutions to development problems, implementing the "development within the plan" model, which is also considered as a concession of liberal policies, believing that this goal will be achieved with a planned economy. On the other hand, economic planning is not only a policy specific to developing countries but developed countries may prefer planned development in different forms in order to increase the effectiveness of the market mechanism. Despite this, it is observed that planned development is generally preferred by developing countries for the development of the economic and social structure (Takım, 2011). Thereby, it can be said that fiscal policy plays an important role in resolving the inflation problem, which is an economic instability, but, first of all, it should be known that since the phenomenon of inflation exceeds the total supply. Policies that will restrain the total demand in the fight against inflation should be preferred. This means a tightening fiscal policy. Contractionary fiscal policy is the fiscal policy pursued to reduce total expenditures by reducing public expenditures and / or increasing taxes. Some of the steps that can be taken in the shrinking fiscal policy can be listed as follows. 

1. Public spending needs to be reduced, as a tightening fiscal policy should be implemented to curb total demand in the fight against inflation. Because public spending is a policy tool that creates vitality in the economy, in other words, increasing the total demand. Therefore, the way to reduce the excess demand, which is the source of inflation, is to reduce public expenditures. 

2. In an inflationary period, the reduction of investment expenditures will be the most powerful tool. The reason for this is that there are large expenditures and their impacts in the long term, and the reduction of investment expenditures will face less social pressure. However, reducing investment spending will hinder the growth of economic capacity in the long run. 

3. As a fiscal policy tool, the public income tool is called a tax policy, as it alone creates a significant part of public revenues and the economic effects of taxes are more tangible. Taxes need to be increased in order to implement a contractionary fiscal policy in the fight against inflation. Because taxes are instruments that erode income. Therefore, it has a narrowing effect in the economy. However, in addition to increasing taxes in general, it is also important to which type of tax to focus on. 

4. According to the need to implement a contractionary fiscal policy in the fight against inflation, the public budget should have surplus more. In other words, increasing public revenues while reducing public expenditures leads to budget surplus. 

5. Savings made during the expansion periods of the economy, as an alternative to consumption, may lead to a decrease in the total demand, thus causing a spontaneous contraction effect. 

6. If banks give the government loans what are not idle, the effect of this on the economy is to reduce demand. However, if the banks are lending their idle funds, this will not have a narrowing effect. 

7. As it is known, in the unemployment insurance application, the state pays unemployment to the unemployed for a certain period of time. This is also a public expenditure. Since unemployment will increase during the recession, unemployment insurance payments by the state will also increase. This means an increase in public spending. Since the increase in public spending will have an expanding effect on the economy, the effect of the initial recession will decrease. On the contrary, as unemployment will decrease during the inflation period, unemployment insurance payments to be made by the state will also decrease. This means a reduction in public spending. Since the decrease in public spending will also have a narrowing effect on the economy, the effect of initial inflation will decrease. Here, there is an automatic (spontaneous) anti-conjuncture development when the government has no willing policy. 

8. The government can guarantee the purchase of unsold products to support some agricultural products. This is an agricultural subsidy, that is, public expenditure. Therefore, the agricultural purchases of the state will increase during the recession periods and this increase in public spending will have an expanding effect automatically. Therefore, in a constrictive fiscal policy, the state may choose to impose restrictions on these expenditures. 

9. As is known, increasing proportionality is the increase in tax rate applied as the tax base increases. In an economy with recession, personal income will decrease and people will now be taxed at a lower rate. Thus, the total tax amount will decrease, which will have an expansionary effect on the economy. Thus, there will be an automatic stabilization. In order for the incremental income tax to become an automatic stabilizer, (a) it is a general tax levied on each person and income; (b) exemptions and exceptions are kept to a minimum; (c) having a steeply increasing rate, in other words, the large difference between the tax rates applied to the slices; (d) collecting the tax at source (withholding); (e) the tax must be levied according to the actual procedure. In the contractionary fiscal policy, the state can do some changes to disable these expansionary features in income taxes. 

2-) Expansionary Fiscal Policy 

The Keynesian paradigm has played an important role in shaping the justification of the state in economic life and the formation of the theoretical basis of fiscal policy. The Keynesian paradigm highlighted effective demand-enhancing policies and claimed that these policies directly affect the level of national income and employment in an underemployment economy. In this respect, the Keynesian paradigm is based on a demand-oriented fiscal policy approach to mitigate cyclical fluctuations and reduce unemployment rates. Depending on this understanding, it was stated that contractionary fiscal policies based on reducing public spending or increasing tax burdens during the period of conjuncture expansion, and expansionary fiscal policies based on increasing public spending or decreasing tax burden during contraction periods were stated (Dökmen and Vural, 2011). In this way, in the expansionary fiscal policy, in which Keynesian economic thought prevails, some financial goals are achieved by giving small or excessive budget deficits. Expenditures are always more than income, in policy acting with open budget. To explain the concept of expansionary fiscal policy economically, it means creating budget deficits such as increasing public expenditures, lowering taxes and so on in order to revive the economy or get rid of deflation. The expansionary fiscal policy aimed at stimulating the economy is used in cases such as production is below its potential, high unemployment rate and low capacity utilization rate. In addition, in the case of demand deficit, although the expansionary monetary policy is one of the policies that can be applied, the expansionary fiscal policy practices emerge as a more suitable option, depending on the nature of the shocks faced, in a situation where inflation expectations also increase. Fiscal policy needs to be put in time to play an active role in stimulating the economy. If there is a situation that requires an expansionary fiscal policy, determining this situation at wrong time and the late implementation of the measures will affect negatively the effectiveness of the fiscal policy on economic activity. The fact that fiscal policy is target-oriented is evaluated from two aspects. First, the use of tax breaks, incentives and other public spending in the short term, with the greatest impact on economic activity. The second is to prioritize measures for those who are most affected by the economic slowdown when designing policy instruments. The fact that the instruments used by the fiscal policy to revive the economy is only valid for a temporary period increases its effectiveness. The opposite of the steps taken in the contractionary fiscal policy causes the results of the expansionary fiscal policy, but it would be useful to mention the 3 main tools by which the government applies these policies. These tools are taxation, public spending and public borrowing. 

First of all, the reduction of taxes has an expander effect and it is an important move for avoiding informal economy by spreading of the tax to the bottom of society. Therefore, it can be said that taxes are one of the most important financial instruments that directly affect the economy. While taxing, the government basically carries out two types of tax collection. These taxes are categorized in two subgroups as indirect and direct taxes. Direct taxes refer to the tax collected from real and legal persons based on their income and wealth. Indirect taxes, on the other hand, mean taxes collected as a result of any consumption action. It will be correct to name Income Tax or Corporate Tax as direct taxes and VAT (Value Added Tax) as indirect tax. In order for tax policies to be fair and increase tax awareness, it is of great importance that the ratio of direct taxes compared to indirect taxes increases. The abandonment of chronic tax amnesties, thus breaking the expectation of tax amnesty, will be very useful in the success of the policies implemented and the regular collection of taxes. Additionally, making control and surveillance more effective during the taxation or tax collection process is crucial for the economy of every country. 

Secondly, the government should make public spending in order to carry out public activities. Sustainability of these activities depends on the expenditure made. The state has the right to intervene in public expenditures depending on the situation in the economy. Public spending; It is categorized under three main titles as investment expenditures, consumption expenditures and transfer expenditures. In all three types of spending, the state can choose any one to increase or decrease it. Increasing spending has an expanding effect on the economy. 

Finally, Public borrowing is one of the tools that directly affect fiscal policy. Due to inflation or stagflation in the economy, the state sometimes cannot meet its financing needs through taxes. In this case, he uses public borrowing as a financial instrument to create a new financing or financing source. This borrowing can be made through legal or natural persons. Depending on the course of the economy, the state can make public borrowing as internal and external borrowing. If the government chooses the domestic borrowing route, it will increase the borrowing level. This indicates that a narrowing effect will occur in the economy as it will mean borrowing in the long term. In this case, increasing public borrowing will have a narrowing effect, while reducing public borrowing will provide an expansionary fiscal policy. Keynes explains the relationship between public debt, taxes, and economic activities as follows: “At the same time, the impact of government-created and classical tax-financed funds on the overall consumption trend needs to be taken into account. Since these are a form of corporate savings, a large-scale public debt reduction policy should be viewed as a factor that reduces consumption trends under certain circumstances. Therefore, the return (or opposite) of the public's return from a borrowing policy to a debt payment policy in the opposite direction has the potential to lead to a serious contraction (or significant expansion) in effective demand”. (Bocutoğlu and Ekinci, 2009) 

RESULT 

In this study, it has been tried to explain the fiscal policies and the factors that stabilize it, in order to affect macroeconomic conditions such as total demand for goods and services, employment, inflation and economic growth. Because, if you ask an economist to explain the growth performance of a particular country he is likely to mention fiscal policy as being an important growth determinant. This deep-seeded belief that taxation, public investment, and other aspects of fiscal policy can contribute to growth miracles as well as to enduring stagnation has been articulated in the context of growth models during the past three decades (Easterly and Rebelo, 1993). There are long-run effects of fiscal policy on potential GDP due to changes in marginal tax rates or changes in the composition of spending (Taylor, 2000). In the study, the starting points and intellectual foundations of these policies based on Keynesian theories are mentioned. Stabilizing factors are explained in the contractionary and expansionary fiscal policies and some methods are proposed to contribute to macroeconomic stability in tax policies. These methods can be listed as lowering tax rates to spread taxes to the base of society, increasing the rate of direct taxes compared to indirect taxes to make tax policies fair, releasing tax amnesties that have become chronic to break tax expectations, making auditing and surveillance more effective. Implementation of the mentioned methods, providing efficiency in resource allocation of fiscal policies, creating efficiency in production, creating efficiency in the distribution, being economically effective, ensuring economic stability, utilizing inflation, deflation or stagflation to achieve full employment, eliminating underemployment, fighting unemployment will be very useful for achieving its goals such as achieving economic growth and development and, most importantly, providing justice in income distribution.

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REFERENCES 

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