6. Drawbacks and Limitations of Fiscal Policy

1. Time lags are significant

♤ Recognition lag: time it takes government to recognize there is a problem

♤ Decision lag: time required for government to determine most appropriate policy

♤ Implementation lag: time it takes to figure out how to implement new directives

♤ Impact lag: time it takes to be felt through multiplier effect

2. Difficulties in changing spending and taxation policies

♤ It is far easier to increase spending and decrease taxes then to increase taxes and decrease spending

3. Conflict between levels of government over appropriate policies

♤ Federal, provincial and city governments may differ on what needs to be done.

♤ Regional variations

4. Crowding out of private investment

♤ Increases interest rates

♤ Reduces amount of funding for private investment

5. Deficits impose net burden on future generations

6. Foreign-owned debt removes capital from economy