Surf Wiki
Save to docs
general/fiscal-policy

From Surf Wiki (app.surf) — the open knowledge base

Fiscal drag

Macroeconomic condition

Macroeconomic condition

Fiscal drag happens when the government's net fiscal position (spending minus taxation) fails to cover the net savings desires of the private economy, also called the private economy's spending gap (earnings minus spending and private investment). The resulting lack of aggregate demand leads to deflationary pressure, or drag, on the economy, essentially due to lack of state spending or to excess taxation.

One cause of fiscal drag may be bracket creep, where progressive taxation increases automatically as taxpayers move into higher tax brackets due to inflation. This tends to moderate inflation, and can be characterized as an automatic stabilizer to the economy. Fiscal drag can also be a result of a hawkish stance towards government finances.

Real fiscal drag

Real fiscal drag takes place when tax thresholds are increased in line with price rises to avoid nominal fiscal drag, but where a growing economy means that earnings rise faster still, so increasing taxes as proportion of earnings.

Political dimension

Ireland is an example of a country in which, in recent years, the progressive income tax system has allowed government revenues to swell due to both nominal and real fiscal drag without either increases in the tax rates or decreases in the thresholds. That is because the country has experienced considerable economic growth, which some attribute to the low-interest monetary regime of the European Central Bank, resulting in high wage inflation. Whereas others attribute to the economic and educational policies of the Irish government, in subsidizing education and eliminating taxation of the arts, two historically low-income demographics that would thus respond strongly to an increase in income, resulting in price inflation and thus wage inflation to retain purchasing power parity.

References

Info: Wikipedia Source

This article was imported from Wikipedia and is available under the Creative Commons Attribution-ShareAlike 4.0 License. Content has been adapted to SurfDoc format. Original contributors can be found on the article history page.

fiscal-policy
Want to explore this topic further?

Ask Mako anything about Fiscal drag — get instant answers, deeper analysis, and related topics.

Research with Mako

Free with your Surf account

Content sourced from Wikipedia, available under CC BY-SA 4.0.

This content may have been generated or modified by AI. CloudSurf Software LLC is not responsible for the accuracy, completeness, or reliability of AI-generated content. Always verify important information from primary sources.

Report