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Fiscal policy can be used to curb economy shocks such as recession. This paper is a critique of how the prime minister of UK can implement fiscal policy at the time of recession and the economic consequences of the policy.
The government can decide to use taxation to regulate the economy by introducing tax incentives or increasing taxation to finance investments. An increase in income tax decreases the net income of individuals. This has the effect of lowering labour productivity as workers do not want to work more hours since they are demotivated.Others may decide to work more hours in order to cover the raise in tax .On the other hand, lowering the starting rate of income tax leads to increased labour productivity and efficiency and also labour supply hence decreasing the level of unemployment and increasing economic growth (Creel & Sawyer, 2009).
Indirect taxes have the effect of increasing or lowering demand for goods and services. An indirect tax on goods such as duty leads to increase in its price and consequently decrease in demand and vice versa. On the other hand, if the government decides to give tax incentives to producers, this will decrease the cost of production and consequently the price of the products. As Barrell (2004) notes, reduction in prices has direct impact of increasing demand for the commodity hence increased economic activities.
Taxation is also a tool for attracting domestic and foreign investments. If a government wants to attract investments, it reduces corporation taxes as well as business taxes. This in turn encourages fixed capital investments by businesses in terms of new machines, technology advancement, developing workers skills as well as developing infrastructure hence more economic development (Creel & Sawyer, 2009). Government also can give tax allowance on research and development and consequently more businesses are set up creating more employment and increasing
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