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Fiscal policy is the use
of government spending,
taxation, and borrowing to
influence a nation's economy.
It is a central tool by which
national governments aim to
achieve macroeconomic objectives
such as stable growth,
high employment,
and low inflation.
Unlike monetary policy,
which is managed by
central banks and focuses
on interest rates
and money supply,
fiscal policy
decisions are taken by
governments and concern
the allocation of
public resources.
Achieving the right
balance between
the public and private
sectors is essential.
While government control of
all economic activity is rare,
intervention becomes
important when
the private sector falters.
Fiscal policy operates
through two main levers,
government spending
and taxation.
When a government spends on
public projects like
roads, hospitals,
and schools, it injects
money into the economy,
creating jobs and
stimulating demand.
Reducing taxes leaves
households and
businesses with more
money to spend or invest.
These are tools of
expansionary fiscal policy,
used to combat recession
or high unemployment.
Conversely, cutting
spending or raising
taxes is contractionary policy
used to control inflation.
The effectiveness of these
measures depends on how
much people choose to
spend rather than save.
In most countries, governments
spend more than they
receive in taxes,
leading to a budget deficit.
To finance this gap,
governments issue bonds
accumulating public debt.
The scale of debt is
often measured relative
