Fiscal Policy


DEFINITION of 'Fiscal Policy'

Government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy. Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (1883–1946), who believed governments could change economic performance by adjusting tax rates and government spending.

BREAKING DOWN 'Fiscal Policy'

To illustrate how the government could try to use fiscal policy to affect the economy, consider an economy that’s experiencing a recession. The government might lower tax rates to try to fuel economic growth. If people are paying less in taxes, they have more money to spend or invest. Increased consumer spending or investment could improve economic growth. Regulators don’t want to see too great of a spending increase though, as this could increase inflation.

Another possibility is that the government might decide to increase its own spending – say, by building more highways. The idea is that the additional government spending creates jobs and lowers the unemployment rate. Some economists, however, dispute the notion that governments can create jobs, because government obtains all of its money from taxation – in other words, from the productive activities of the private sector.

One of the many problems with fiscal policy is that it tends to affect particular groups disproportionately. A tax decrease might not be applied to taxpayers at all income levels, or some groups might see larger decreases than others. Likewise, an increase in government spending will have the biggest influence on the group that is receiving that spending, which in the case of highway spending would be construction workers.

Fiscal policy and monetary policy are two major drivers of a nation’s economic performance. Through monetary policy, a country’s central bank influences the money supply. Regulators use both policies to try to boost a flagging economy, maintain a strong economy or cool off an overheated economy.

For more on fiscal policy, read What is Fiscal Policy?

  1. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  2. Fiscal Cliff

    A combination of expiring tax cuts and across-the-board government ...
  3. Fiscal Multiplier

    The ratio in which the change in a nation's income level is affected ...
  4. Economic Stimulus

    Attempts by governments or government agencies to financially ...
  5. Budget Surplus

    A situation in which income exceeds expenditures. The term "budget ...
  6. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
Related Articles
  1. Economics

    How the Fed Fund Rate Hikes Affect Your Stock Portfolio

    Understand how potential increases in the federal funds rate affect equities and alternative investments. Learn about the effects on a stock portfolio.
  2. Mutual Funds & ETFs

    ETF Analysis: Direxion Daily Energy Bear 3x

    Learn about the Direxion Daily Energy Bear 3x (NYSE Arca: ERY) exchange-traded fund (ETF). ERY gains when energy prices drop, with triple the leverage.
  3. Economics

    A Look at How China Controls Its Population

    Discover the many tactics China utilizes to control its population, and learn how the population control movement is driven by economic concerns.
  4. Economics

    The U.S. National Spending And Debt

    Just like any average American household, government overspending can carry on for extended periods by rolling over debt and borrowing more and more money in what seems like a never-ending game ...
  5. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  6. Economics

    What Is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy.
  7. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  8. Economics

    Exploring The Current Account In The Balance Of Payments

    Learn how a country's current account balance reflects the country's economic health.
  9. Economics

    Austerity: When The Government Tightens Its Belt

    When a government tightens its belt in tough economic times the entire nation feels the squeeze.
  10. Bonds & Fixed Income

    Understanding Capital And Financial Accounts In The Balance Of Payments

    The current, capital and financial accounts compose a nation's balance of payments.
  1. How can the federal reserve increase aggregate demand?

    The Federal Reserve can increase aggregate demand in indirect ways by lowering interest rates. Aggregate demand is a measure ... Read Full Answer >>
  2. Why is the employment figure important to a "dove"

    The employment figure is important to doves, because they are primarily concerned with the health of the labor market. Doves ... Read Full Answer >>
  3. Why would a country's gross domestic product (GDP) and gross national income (GNI) ...

    A country’s gross domestic product, or GDP, and gross national income, or GNI, are likely to differ considerably because ... Read Full Answer >>
  4. Is gross national income (GNI) or gross domestic product (GDP) a better measure of ...

    While gross domestic product, or GDP is among the most popular of economic indicators, gross national income, or GNI, is ... Read Full Answer >>
  5. What is the purpose for issuing contractionary policy?

    The purpose of issuing contractionary policy is to fight inflationary pressures. Contractionary policy can be transmitted ... Read Full Answer >>
  6. How can a change in fiscal policy have a multiplier effect on the economy?

    A change in fiscal policy has a multiplier effect on the economy because fiscal policy affects spending, consumption and ... Read Full Answer >>
  7. What are the pros and cons of a progressive tax policy and who benefits the most ...

    Those who oppose a progressive tax hierarchy are likely to be those who pay more taxes when such a policy is in place. A ... Read Full Answer >>
  8. How do fiscal and monetary policies affect aggregate demand?

    Aggregate demand is a macroeconomic concept representing the total demand for goods and services in an economy. This value ... Read Full Answer >>
  9. Which is more effective: expansionary fiscal policy or expansionary monetary policy?

    In terms of improving the real economy, expansionary fiscal policy is more effective. In terms of the financial economy, ... Read Full Answer >>
  10. What are common examples of aggregate demand shocks?

    According to macroeconomic theory, a demand shock can be anything that causes a sudden and unexpected shift in the aggregate ... Read Full Answer >>
  11. What can policymakers do to decrease cyclical unemployment?

    Downturns in the business cycle cause cyclical unemployment, so policymakers should focus on expanding output, which they ... Read Full Answer >>
  12. How does the government spend my taxes?

    Where does the government get all of the money it spends? From taxpayers. The government does not have its own money. Its ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center