In the United States, fiscal policy is directed by the executive and legislative branches. In the executive branch, the two most influential offices belong to the president and the Treasury secretary, although contemporary presidents often rely on a council of economic advisers. The U.S. Congress passes laws and appropriates spending for any fiscal policy measures. This involves participation, deliberation and approval from both the House of Representatives and the Senate.
The Judicial branch, or the court system in the U.S., can have an impact on fiscal policy by legitimizing, amending or declaring unconstitutional certain measures taken by the executive or legislative branches to affect the national economy
The so-called “Taxing and Spending Clause” of the U.S. Constitution, Article I, Section 8, Clause 1, authorizes Congress to levy taxes. However, the Constitution really only specifies two legitimate purposes for taxation: to pay the debts of the federal government and to provide for the common defense. Even though an argument could be made that this excludes the use of taxes for fiscal policy purposes, such as cutting taxes as an expansionary tool, basic macroeconomics suggests that any level of taxation has an impact on aggregate demand.
The power to spend to encourage certain outcomes has been generally interpreted as constitutional ever since the South Dakota v. Dole ruling by the U.S. Supreme Court.
The Use of Fiscal Policy in the United States
Fiscal policy refers to an economic strategy that utilizes the taxing and spending powers of the government to impact a nation’s economy. It is distinct from monetary policy, which is usually set by a central bank and focuses on market interest rates and the money supply. Contemporary fiscal policy is largely founded on the economic theories of John Maynard Keynes, a 20th century British economist who rose to prominence during the Great Depression.
Generally speaking, expansionary fiscal policy in the U.S. has been pursued through a combination of spending public funds on politically attractive ends, such as infrastructure, job training or anti-poverty programs, and lowering taxes on all or some taxpayers. Per Keynesian economic theory, both government spending and tax cuts should boost aggregate demand, the level of consumption and investment in the economy, and help reduce unemployment.
Fiscal policies in the U.S. are normally tied into each year’s federal budget, which is proposed by the president and approved by Congress. However, there have been times when no budget has been proposed, thus making it more difficult for market participants to react and adjust to coming fiscal policy proposals.
Once the budget is approved, Congress then develops “budget resolutions,” which are used to set parameters for spending and tax policy. After resolutions are made, Congress begins the process of appropriating funds from the budget toward specific targets. These appropriations bills must be signed by the president before they can be enacted.