What Is Fiscal Neutrality?

Fiscal neutrality refers to a principle or goal of public finance that fiscal decisions (taxin♎g, spending, or borrowing) of a government can or should avoid distorting economic decisions by businesses, workers, and consumers. A policy change can be considered to be neutral to the economy in either a macro- or microeconomic sense (or both).

In a macroeconomic sense, the idea of a fiscally neutral policy is one in which demand is neither stimulated nor diminished by taxation and government spending. In a microeconomic sense, a policy that displays fiscal neutrality does not incentivize (encourage or discourage) any type of transaction 🔥or economic behavior relative to others. Fiscal neutrality may a💦lso refer strictly to the budgetary impact of a policy change in that it neither increases nor decreases a projected budget deficit or surplus. 

How Fiscal Neutrality Works

Because the term fiscal neutrality can be applied in several different seﷺnses, it is important to understand the context and purpose for which it is being used in order to understand its meaning. 

Budgetary Neutrality

Strict budgetary neutrality is when a policy change does not result in any net change in a government entity’s total budgetary balance. Any new spending introduced by a policy🔯 change that is fiscally neutral in this sense is expected to be entirely offset by additional revenues generated; the net effect of the policyཧ change is neutral with respect to the balance of the government’s budget. 

For example🅷, a policy to proꩵvide tax credits for the purchase of new automobiles, along with an increase in the tax on gasoline, might be fiscally neutral if the tax increase is sufficient to pay for the cost of the tax credits.  

This may be considered a desirable🔜 feature and may increase the chance of a policy change’s acceptance and passage into law. Legislative pay-as-you-go rules could encourage or even mandate that some or all new policy measures be fiscally neutral in this sense.  

Macroeconomic Neutrality

In the realm of macroeconomic 澳洲幸运5开奖号码历史查询:fiscal policy, government deficit spending, or budget surpluses, are encouraged as a means to increase or decrease 澳洲幸运5开奖号码历史查询:aggregate demand in the economy in order to stabilize 澳洲幸运5开奖号码历史查询:macroeconomic growth and avoid 澳洲幸运5开奖号码历史查询:recessions. A situation where spending exceeds the revenue generated from taxes is called a澳洲幸运5开奖号码历史查询: fiscal deficit and requires the government to borrow money to cover the 澳洲幸运5开奖号码历史查询:shortfall. When tax revenues exceed spending, a fiscal s൩urplus results, and the excess money can be invest♏ed for future use. 

A 澳洲幸运5开奖号码历史查询:balanced budget is an example of fiscal neutrality, where government spending is covered almost exactly by tax revenue – in other words, where tax revenue is equal to government spending. Fiscal neutrality in this sense means that the government’s overall fiscal policy is neutral with respect to aggregate demand in the economy. Because the government doesn't have a surplus nor a budget deficit, according to 澳洲幸运5开奖号码历史查询:Keynesian economics this type of fiscal policy will♌ neither expand nor contract aggregate demand. 🐟

Continuing the example of an auto tax credit coupled with an increase in gasoline taxes, it is clear that such a policy is also fiscally neutral in a macroeconomic sense provided the increased demand for 𝐆new autos is offset by the decreased demand for gasoline thus creating no net change in aggregate demand. 

Microeconomic Neutrality

In a microeconomic sense, fiscal neutrality centers on the idea that government policy can influence individual economic behavior. A neutral fiscal policy iꦑn sense is one that leaves individuals to decide to work, consume, save, invest, or engage in other economic actions unaltered. 

This type of fiscal neutrality focuses on designing mechanisms of taxation because it is never possible for government spending not to influence microeconomic behavior. When a government spends money to p🐎urchase real goods and services, it necessarily influences the prices of those goods and services and removes them from availability on the market or other users and uses thus altering the behavior of other market participants.  

Once again continuing the example from above (an auto tax credit and offsetting gasoline tax), such a policy is definitely not fiscally neutral♈ in a microeconomic sense, because it influences consumers to change their economic behavior by buying more new autos and payinꦍg higher prices for gasoline.