Macro Economics 1 FISCAL POLICY PDF

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TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNG CƠ SỞ I HÀ NỘIKHOA QUẢN TRỊ KINH DOANHTIỂU LUẬN MÔN KINH TẾ VĨ MÔĐỀ TÀI: FISCAL POLICYSINH VIÊN:1 TUẤN PHONG ( MSV:1912280540)2. LÂM BẢO NGỌC ( MSV:1914280022)3Ạ VŨ DUY ANH ( MSV:1912280002)4ỄN THỊ MAI LY ( MSV:1912280715)5ỄN MINH TUẤN ( MSV:1912280028)6ẠM QUỲNH PHƯƠNG ( ...

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TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNG CƠ SỞ I HÀ NỘI KHOA QUẢN TRỊ KINH DOANH

TIỂU LUẬN MÔN KINH TẾ VĨ MÔ ĐỀ TÀI: FISCAL POLICY SINH VIÊN: 1. PHAN TUẤN PHONG ( MSV:1912280540) 2. LÂM BẢO NGỌC ( MSV:1914280022) 3. TẠ VŨ DUY ANH ( MSV:1912280002) 4. NGUYỄN THỊ MAI LY ( MSV:1912280715) 5. NGUYỄN MINH TUẤN ( MSV:1912280028) 6. PHẠM QUỲNH PHƯƠNG ( MSV:1912280724) 7. PHẠM MINH HẠNH ( MSV:1912280516) 8. VŨ PHƯƠNG LINH ( MSV:1912280528) 9. NGÔ MINH HẰNG ( MSV:1912280709) 10.

TRƯƠNG MINH NGỌC ( MSV:1912280023) LỚP: K58 ANH 03 CTTT QUẢN TRỊ NGÀNH: QUẢN TRỊ KINH DOANH QUỐC TẾ

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Hà Nội, ngày 18 tháng 9 năm 2020. MỤC LỤC I.

INTRODUCTION……………………………………………………………02

II.

ECONOMIC PROBLEMS IN JAPAN……………………………………....04

III.

HOW JAPAN USED FISCAL POLICY TO DEAL WITH ECONOMIC PROBLEMS? – ABENOMICS………………………………………………05 THE STRENGTHS AND WEAKNESSES OF FISCAL POLICY………….13

IV.

REFERENCES……………………………………………………………….15

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I.

INTRODUCTION 1. What is fiscal policy?  Definition: Fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure (spending) to influence a country's economy.  Stances: Depending on the state of the economy, fiscal policy may reach for different objectives: its focus can be to restrict economic growth by mediating inflation or, in turn, increase economic growth by decreasing taxes, encouraging spending on different projects that act as stimuli to economic growth and enabling borrowing and spending. The three stances of fiscal policy are the following: Neutral fiscal policy is usually undertaken when an economy is in neither a recession nor an expansion. The amount of government deficit spending (the excess not financed by tax revenue) is roughly the same as it has been on average over time, so no changes to it are occurring that would have an effect on the level of economic activity. Expansionary fiscal policy is used by the government when trying to balance the contraction phase in the business cycle. It involves government spending exceeding tax revenue by more than it has tended to, and is usually undertaken during recessions. Examples of expansionary fiscal policy measures include increased government spending on public works (e.g., building schools) and providing the residents of the economy with tax cuts to increase their purchasing power (in order to fix a decrease in the demand). Contractionary fiscal policy, on the other hand, is a measure to increase tax rates and decrease government spending. It occurs when government deficit spending is lower than usual. This has the potential to slow economic growth if inflation, which was caused by a significant increase in aggregate demand and the supply of money, is excessive. By reducing the economy's amount of aggregate income, the available amount for consumers to spend is also reduced. So, contractionary fiscal policy measures are employed when unsustainable growth takes place, leading to inflation, high prices of investment, recession and unemployment above the "healthy" level of 3%– 4%. 2. Purpose of using Fiscal Policy  Methods of Fiscal Policy funding: Governments spend money on a wide variety of things, from the military and police to services such as education and health care, as well as transfer payments such as welfare benefits. This expenditure can be funded in a number of different ways:

Taxation Seigniorage, the benefit from printing money 3

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Borrowing money from the population or from abroad Dipping into fiscal reserves Sale of fixed assets (e.g., land) How does fiscal policy work: When politicians influence the economy, they have two main tools at their disposal; fiscal policy and monetary policy.  Monetary Policy Monetary policy is the main focus of a nation’s central bank. It involves regulating interest rates, i.e., effectively regulating the cost of borrowing, and the money supply. The US Federal Reserve, the Bank of England, and other central banks manage monetary policy. They do so to control inflation and stabilize their currency. Put simply; they use monetary policy to ensure that the economy is following the right path. 

Fiscal Policy

Fiscal policy refers to government spending policies that impact macroeconomic conditions. Governments carry out policy through public spending. Government borrowing and the collection of taxes also form part of fiscal policies. Through fiscal policy, governments attempt to bring down unemployment, stabilize business cycles, and influence interest rates. Additionally, in times of recession, they adjust their policy to kick-start the economy. I.

ECONOMIC PROBLEMS IN JAPAN Until 2002, Japan was mired in a prolonged period of stagnation – the “lost decade”–which saw its per capita income drop from the fifth highest in the OECD area in 1992 to only 19th in 2002. The miracle economy that mesmerized the world in the 1980s looked decidedly weak. 

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Japan's equity and real estate bubbles burst starting in the fall of 1989. Equity values plunged 60% from late 1989 to August 1992, while land values dropped throughout the 1990s, falling an incredible 70% by 2001. Moreover, the Bank of Japan (BoJ), Japan’s Central Bank had made several mistakes that may have added to and prolonged the negative effects of the bursting of the equity and real estate bubbles. From 1991 to 2003, the Japanese economy, as measured by GDP, grew only 1.14% annually, well below that of other industrialized nations. Over the period of 1995 to 2007, GDP fell from $5.33 trillion to $4.36 trillion in nominal term, real wages fell around 5%, while the country experienced a stagnant price level. In 1997, GDP of Japan decreased by 0.7% and continued to decreased by 1.8% in the following year. 4

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Since the beginning of 1998, the Japanese economy fell into a serious recession. The world financial crisis in 2008 once again caused Japan's economic recession, GDP decreased by 5% in 2009. On the monetary side, the short-term interest rate is already close to zero at 0.5%, while the large budget deficit and high level of public debt rule out fiscal stimulus as an option. Indeed, Japan’s public debt has reached 170% of GDP, the highest ratio ever recorded in the OECD area Expressed by financial and monetary system crisis, the yen, stocks fell sharply, bad debts increased, production stagnated and unemployment rate rose to a record. In 2012, with efforts to solve deflation, The Prime Minister Abe Shinzo launched “Abenomics” Policy.

HOW JAPAN USED FISCAL POLICY TO DEAL WITH ECONOMIC PROBLEMS? – ABENOMICS. 1. The difficult situation:  In the early 1990s, Japan’s real estate and stock market bubble burst and the economy went into a tailspin. Since then, Japan has suffered sluggish economic growth and recessions (known as “Japan’s Lost Decade”). Japan’s growth rate during this period has been among the lowest of the major developed countries of the world.  Japan's equity and real estate bubbles burst starting in the fall of 1989. Equity values plunged 60% from late 1989 to August 1992, while land values dropped throughout the 1990s, falling an incredible 70% by 2001. Moreover, the Bank of Japan (BoJ), Japan’s Central Bank had made several mistakes that may have added to and prolonged the negative effects of the bursting of the equity and real estate bubbles.  During 1995–2002, for example, the annualized growth rate of Japan’s real gross domestic product (GDP) averaged only 1.2%. This was lower than the eurozone average of 2.7%, and was less than the other Group of 7 countries: Canada (3.4%), France (2.3%), Germany (1.4%), Italy (1.8%), the United Kingdom (2.7%), and the United States (US) (3.2%).  Japan’s performance was also poor in comparison to the 2.7% average of the Organisation for Economic Co-operation and Development (OECD), and was significantly less than that of the larger OECD countries: Australia (3.8%), the Republic of Korea (5.3%), Mexico (2.6%) the Netherlands (2.9%), and Spain (3.3%) (Horioka 2006).  Figure 1 shows the trend of Japan’s real GDP and the real GDP growth rate during 1990–2013. After Japan’s economic bubble burst in the early 1990s Japanese real GDP started to decline sharply. This longterm recession lasted almost 25 years.

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2. Causes of long-term recession: 2.1. Aging Population  Japan has achieved the highest life expectancy in the world, but its retirement age is still 65 years of age.  Figure 2 shows that the working population (i.e., those aged between 15 and 64) is diminishing drastically while the elderly population (those aged 65 and older) is growing rapidly.  The aging population and the diminishing workforce is one of the biggest causes of long-term recession in Japan. On the other hand, Japan’s method for calculating wages is based on seniority.  Seniority-based wage systems make it difficult for companies to hire elderly people. They are often forced to retire, even though many of them would like to continue working. Because of the aging population, social welfare costs have started to increase and currently one-third of government spending is allocated to this, while the government budget deficit is rising every year.

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2.2 Banking Behavior  In the 1980s, Japanese banks issued loans based on collateral. From 1991 onwards, land prices started to decline and banks began to accumulate bad loan assets. The number of banking failures started to increase immediately after the financial bubble burst, reaching a peak almost one decade later.

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Figure 4 shows that before the bubble burst, there was no banking failure and assistance from the Deposit Insurance Corporation of Japan (DICJ), the financial system’s insuring organization, was almost at zero. When banks began to fail after the bubble burst, the DICJ began to raise financial assistance to help the failed banks. This assistance also peaked a decade after the bursting of the bubble. 7

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Another obstacle in the banking system is the Basel capital requirements. Basel I regulations forced banks to hold 8% capital, regardless of economic conditions. Japanese banks started to reduce their loans to avoid a shortage of capital, which created a credit crunch, and it became difficult for SMEs and startup businesses to borrow money from banks. Figure 5 shows the results of a survey conducted by the Bank of Japan investigating the difficulty for large firms and small and medium-sized enterprises to raise money from banks or from the capital markets. Data points below zero signify difficulty for companies in raising money. The figure shows that smaller enterprises find it harder to raise money than larger firms. 

2.3 Reduced Effectiveness of Fiscal Policy  Kiichi Miyazawa, Prime Minister of Japan from 1991 to 1993, implemented fiscal policy when the Japanese economy was slow to recover in the 1990s. He followed a Keynesian policy, hoping for a high growth period in Japan in which public investment would help boost the Japanese economy.  However, major highways and bridges had already been completed and investment in new infrastructure did not help the economy due to a decline in the multiplier for public investment. Public investment in Japan has tended to produce low stimulative effects on gross national product because of ineffective distribution. The bulk of public 8

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investment has been concentrated in the countryside, and research shows that such investment has a much smaller impact on rural areas than on urban areas and that public investment in the agriculture sector has been much less effective than public investment in the industrial and service sectors (Yoshino and Sakakibara 2002). The result of this increasing rural and agricultural bias in the allocation of public investment is that the multiplier of public investment declined sharply from about 2.5 to as low as 1 (Yoshino, Kaji, and Kameda 1998). This shows that such public investment only increases budget deficits; it cannot bring about a recovery of the Japanese economy. The results of this misallocation are seen in declining returns from public and private investment, as reported by Yoshino and Nakahigashi (1999, 2000) in Table 2. The marginal productivity of public capital was high during the highgrowth period (1955–1969) but declined from 1970 onward. It is likely that the misallocation of public capital also contributed to a lower rate of return from private capital, since public investments did not remove the “infrastructure bottlenecks” that lower the rate of return from private investment.

2.4 High Appreciation of the Yen in the Mid-1990s  Figure 6 shows fluctuations in the dollar–yen exchange rate during 1990–2014. Appreciation of the yen in the mid–1990s caused Japanese manufacturing companies to relocate from Japan to other Asian countries. Wage increases also pushed Japanese companies abroad. As a result, domestic production started to diminish.  Figure 7 shows Japanese outward foreign direct investment to other Asian economies including the PRC; Hong Kong, China; India; and Indonesia from 1989 to 2004.

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3. The birth of Abenomics:  After serving as prime minister briefly from 2006 to 2007, Shinzō Abe began a second term in December 2012. Soon after resuming office, he launched an ambitious plan to bolster Japan’s stagnant economy. Abe announced that he and his cabinet would "implement bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment, and with these three pillars, achieve results."  Abe’s program consists of three “arrows.” The first consists of printing additional currency – between 60 trillion yen to 70 trillion yen – to make Japanese exports more attractive and generate modest inflation roughly 2%. This dealt with cause 2.4. 10

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The second arrow entails new government spending programs to stimulate demand and consumption—to stimulate short-term growth, and to achieve a budget surplus over the long term. This deals with cause 2.3. The third component of Abenomics is more complex—a reform of various regulations to make Japanese industries more competitive and to encourage investment in and from the private sector. This includes corporate governance reform, easing of restrictions on hiring foreign staff in special economic zones, making it easier for companies to fire ineffective workers, liberalizing the health sector and implementing measures the help domestic and foreign entrepreneurs. The proposed legislation also aimed to restructure the utility and pharmaceutical industries and modernize the agricultural sector. Most important, perhaps, was the Trans-Pacific Partnership (TPP), which was described by economist Yoshizaki Tatsuhiko as potentially the "linchpin of Abe's economic revitalization strategy," by making Japan more competitive through free trade.

4. Abenomics’ impacts on the economy:  Abenomics initially was a major success. The economy marked a trough in November 2012 and turned upward, a change that was reflected in major economic indicators.  Real GDP accelerated its growth from 0.8% in fiscal 2012 to 2.6% in fiscal 2013. Similarly, nominal GDP rose from 0.1% to 2.6%.  The unemployment rate fell from 4.2% in October–December 2012 to 3.6% in January–March 2014, and the ratio of active job openings to active applicants climbed from 0.82 to 1.05. 11

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Consumer prices excluding fresh foods increased year on year from -0.1% in October–December 2012 to 1.3% in January–March 2014. To summarize, the economy accelerated, employment conditions improved, and the consumer price index turned positive.

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III.

THE STRENGTHS AND WEAKNESSES OF FISCAL POLICY Fiscal policy is known as a tool for government to stabilize and develop the economy specially when it turned into recession and crisis instead of letting the market self-regulate with the invisible hand. However, fiscal policy is not always good for the economy, even if it is used in wrong way then the situation of the economy can become worse. - Strengths: + Fiscal policy allows the government to flexible intervene in Japan's deflationary economy by introducing stimulus packages to the Japanese economy. As a result, Japanese economy witnessed many positive change which improve standard of living of Japanese people. + Tools of fiscal policy include tax tools, spending tools, and financing tools for budget deficits. Government spending policies are also very diverse, but can be roughly divided into two main parts: recurrent expenditure (such as salaries for civil servants, spending on education, health care, and faculty). learning-technology, security-defense) and development investment (such as construction of socioeconomic infrastructure) which stimulus the economy and drive it into the right way. Japanese government and President Shinzo Abe had used appropriately and effectively the Abenomics. The economy of Japan accelerated, employment conditions improved, and the consumer price index turned positive. - Weakness: + The government implements an easing fiscal policy by increasing government spending. But in order to finance those expenses, the state issued bonds. According to Robert Barro – an famous economist, he affirms: people, with rational expectations, will understand that today when a state borrows, the state will increase taxes in order to pay off debt, so it will reduce consumption and increase savings. today for the future to have money to pay taxes. Thus, although the state increases its consumption but reduces personal consumption, the effectiveness of financial policy will not be as high as expected by the state. And it was true for Japan, it is very hard to change the saving habit of Japanese – which not really good for a deflationary economy. + In some country, fiscal policy may take a lot of time to be approved. Governments that want to make investments (government expenditures) often have to seek approval from parliament and it may be rejected. However, Japan did not have this situation, instead, Abenomics was approved and done effectively + The government wants to implement looser fiscal policy by increasing government spending. Assuming it is passed by the National Assembly, it will take time to wait for the National Assembly to consider and discuss. After that, in order to deploy, activities such as project planning, survey and design must be carried out to implement investment. These also take a lot of time. Therefore, there is a lag for lax fiscal policy to take effect.

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REFERENCES 1. Wikipedia Contributors (2019). Fiscal policy. [online] Wikipedia. Available at: https://en.wikipedia.org/wiki/Fiscal_policy. 2. Market Business News. (n.d.). What is fiscal policy? Definition and meaning. [online] Available at: https://marketbusinessnews.com/financial-glossary/fiscal-policydefinition-meaning/ [Accessed 17 Sep. 2020]. 3. Investopedia. (2019). 3 Economic Challenges Japan Faces in 2019. [online] Available at: https://www.investopedia.com/articles/investing/123015/3-economicchallenges-japan-faces-2016.asp. 4. oecdobserver.org. (n.d.). Japan’s economic challenges - OECD Observer. [online] Available at: https://oecdobserver.org/news/archivestory.php/aid/2607/Japan_s_economic_challeng es.html [Accessed 17 Sep. 2020]. 5. nippon.com. (2018). Abenomics: An Economic Recovery, but Growth Strategies Yield Few Results. [online] Available at: https://www.nippon.com/en/in-depth/a06202/ [Accessed 17 Sep. 2020]. 6. Investopedia. (2019b). Abenomics. [online] Available at: https://www.investopedia.com/terms/a/abenomics.asp. 7. Yoshino, N. and Taghizadeh-Hesary, F. (2015). ADBI Working Paper Series Japan’s Lost Decade: Lessons for Other Economies Asian Development Bank Institute. [online] Available at: https://www.adb.org/sites/default/files/publication/159841/adbiwp521.pdf. 8. Investop...