Fiscal Policy
Fiscal policy refers to the government's use of spending and taxation to influence economic activity and manage the public finances. Governments may change spending or taxes in response to economic conditions, policy priorities or concerns about borrowing and debt.
What is expansionary and contractionary fiscal policy?
Expansionary fiscal policy is designed to support economic activity. It can involve higher government spending, lower taxes or a combination of the two.
Contractionary fiscal policy aims to reduce demand or improve the government's fiscal position and may involve lower spending or higher taxes.
Fiscal policy can also change automatically as the economy moves through the business cycle. During a downturn, for example, tax revenues may fall while spending on unemployment benefits rises without the government announcing new measures.
How is fiscal policy assessed?
Economists often consider indicators such as:
- The budget deficit or surplus
- Government borrowing
- Public debt
- Tax revenues
- Government expenditure
The effect of fiscal policy depends on the size, timing and composition of the measures as well as wider economic conditions and how households and businesses respond.
