Investment sources include:
·Private saving
·Government saving
·Borrowing from foreigners

Capital markets are influenced by fiscal policy in two ways:

·Government spending and tax policy will generate either a budget surplus or a deficit, which will in turn mean that the government sector will either contribute towards financing investment or "crowd out" private investment.
·Tax policy will affect the amount saved. Taxes on interest earned will decrease the incentive to save and create a wedge between the after-tax interest earned by savers and the interest rate paid by firms.

Generational Effects of Fiscal Policy
Current fiscal policy impacts the amount of taxes that future citizens will pay. If the government runs up long-term budget deficits, then future generations will need to pay higher taxes in order to pay the interest. Similarly, future generations will pay lower taxes if the government creates budget surpluses. Economists have created systems which examine the lifetime taxes and benefits associated with generations or age groups. Those systems are referred to as generational accounting.

A government that chronically runs deficits will, at some point in time, have to address that imbalance. This fiscal imbalance will need to be addressed with higher tax revenues and/or reduced government spending.An imbalance is also created when the government benefits received by one generation exceed the taxes paid by that generation. For example, initial recipients of Social Security in the United States received far more benefits than they paid in taxes. Such imbalances are referred to as generational imbalances.Future generations will need to pay more taxes, or receive less benefits, in order to address this imbalance. Fiscal policy therefore transfers benefits according to age; it also determines how much each generation will pay the government.



The Multiplier Effect

Related Articles
  1. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  2. Insights

    What is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy.
  3. Taxes

    What's Wrong with the American Tax System

    American's are highly taxed and we still run a deficit. We explain why.
  4. Trading

    Breaking Down The U.S. Budget Deficit

    Find out why this particular piece of national financing gets so much attention from the media and investors.
  5. Personal Finance

    Explaining Budget Surplus

    Budget surplus is an economic term describing a situation where revenue exceeds expenditures.
  6. Trading

    A Look At Fiscal And Monetary Policy

    Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate the economy.
  7. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  8. Insights

    What is the Fiscal Year-End?

    It’s an important consideration for determining taxes, expenses and other financial matters.
  9. Personal Finance

    Fiscal Policy

    Fiscal Policy is the combined governmental decisions regarding its taxing and spending.
  10. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
Frequently Asked Questions
  1. Where else can I save for retirement after I max out my Roth IRA?

    The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer ...
  2. How did George Soros "break the Bank of England"?

    In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually ...
  3. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    It's important to know your debt-to-income ratio because it's the figure lenders use to measure your ability to repay the ...
  4. Who are Monsanto's main competitors?

    Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
Trading Center