Fiscal Policy
Fiscal policy is the use of government spending and taxation to influence the economy. It is one of the two main instruments of macroeconomic policy, alongside monetary policy, and is used by governments to promote growth, reduce unemployment, and stabilise prices.[1]
Definition
Fiscal policy refers to the decisions a government makes about the level and composition of taxation and public spending. These decisions affect the overall level of demand in the economy, the distribution of income, and the provision of public services.[1]
Types
Fiscal policy may be classified as expansionary or contractionary:
| Type | Measures | Purpose |
|---|---|---|
| Expansionary Fiscal Policy | Increase spending, cut taxes. | Stimulate demand, reduce unemployment. |
| Contractionary fiscal policy | Cut spending, raise taxes. | Cool an overheating economy, reduce inflation. |
Fiscal policy may also be discretionary (deliberate policy changes) or automatic (arising from automatic stabilisers such as unemployment benefits, which rise in a downturn and fall in a boom).[1]
Objectives and constraints
The objectives of fiscal policy include supporting economic growth, stabilising the economy, redistributing income, and financing public goods. Its constraints include the level of national debt, the size of the fiscal deficit, and the risk of crowding out private investment. The appropriate stance depends on the state of the business cycle and the economy's position relative to potential output.[1]