Introduction to Fiscal Policy

Fiscal policy refers to taxing and spending policies of governments, often with specific focus on budgeting and the effect of taxing and spending on the broader economy. Fiscal policy is one of, if not the, largest way in which governments affect economies.

Frequently Asked Questions
  • Can state and local governments in the US run fiscal deficits?

    There is nothing inherent preventing state and local governments from running deficits in the same way that national governments do. However, almost all U.S. State constitutions have balanced budget amendments, which legally prevent those specific states from doing so.

  • How does contractionary fiscal policy lead to the opposite of the crowding-out effect?

    Contractionary fiscal policy can decrease the crowding-out effect by increasing the amount of credit available to other borrowers because less lending is going to the government to finance its debt.

  • Can U.S. states declare bankruptcy?

    No, States cannot declare bankruptcy as it is not permitted by U.S. bankruptcy law. In addition, the U.S. Supreme Court decided in 1977 that Article 1, Section 10 of the U.S. forbids them from doing so.

  • What is the role of deficit spending in fiscal policy?

    Deficits are a critical tool in fiscal policy, allowing extra spending over and above what the government collects in taxes. This allows governments to finance important initiatives such as infrastructure improvement, economic stimulus during economic downturns, and national defense in wartime.

Key Terms

Explore Introduction to Fiscal Policy

All About Fiscal Policy: What It Is, Why It Matters, and Examples
sheep at white house
The 5 Poorest U.S. Presidents
International Monetary Fund
Special Drawing Rights (SDRs): Definition and Requirements
People in shirtsleeves sit at trading desks in a large room
Smoot-Hawley Tariff Act
Deflation: Definition, Causes, Changing Views on Its Impact
Who Prints Money in the U.S.?
Senate Judiciary Committee Holds Hearing On Pending Nominations
Crapo Bill
A agricultural producer rides a tractor in front of solar panels.
Subsidies: Definition, How They Work, Pros and Cons
Chart
Financial System: Definition, Types, and Market Components
Making trading online on the smart phone
Economic Factors That Cause Currency Depreciation
Close-up of Chinese Yuan
How Does China Manage Its Money Supply?
Fiscal Policy
What Is the Role of Deficit Spending in Fiscal Policy?
Low angle view of modern office buildings skyscrapers in Manhattan Midtown, New York
What Is the Difference Between Helicopter Money and QE?
A gavel next to gold coins
Lawful Money
Full Frame Shot of US Paper Currency
Components of the 2008 Bubble
Senator Warren speaking at a podium
Elizabeth Warren's Economic Plan
How does contractionary fiscal policy lead to the opposite of the crowding-out effect?
The US Federal Reserve building in Washington DC
Agency MBS Purchase
World Currency Rates
Standard of Value
Fiscal Neutrality
Implementation Lag
Fiscal Capacity
Financial Stability Plan (FSP)
U.S. capitol building
What Is Sequestration?
Mint
Can State and Local Governments in the US Run Fiscal Deficits?
U.S. President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act
Sarbanes-Oxley vs. Dodd-Frank
Calculator keyboard with Tax- and Tax+ keys
Global Corporate Minimum Tax
2022 Form 1099-NEC
Form 1099-NEC: Nonemployee Compensation
Man doing his taxes
SALT (State and Local Tax)
Elderly couple speaking with a doctor in a hospital looking at a tablet
Medicare Tax: What It Is, Who Has to Pay It, Current Rates
Cover of 2021 Purple Book (it’s solid purple)
The Purple Book
1040 Tax form surrounded by dollar bills
Tax Revenue
Tampons
Tampon Tax
NAFTA agreement written on signpost in mountains. Negotiations concept. Withdrawal concept.
Free Trade Agreement (FTA) Definition: How It Works, With Example
Regressive vs. Proportional vs. Progressive Taxes: What's the Difference?
Value-Added Tax (VAT) Definition
Value-Added Tax (VAT)
Goods and Services Tax (GST): Definition, Types, and How It's Calculated
Tax Forms, Pencil and Receipts
Regressive Tax: Definition and Types of Taxes That Are Regressive
Taxation
Taxation Defined, With Justifications and Types of Taxes
Container Cargo Ship and Cargo Plane With Working Crane Bridge in Shipyard at Sunrise
Section 232 of the Trade Expansion Act
Calculator and tax forms
Section 1250: What Is 1250 Property, Taxation, and Example
Small wooden tiles reading TAX next to money and a pushpin, all on a calendar
A Brief History of Taxes in the U.S.
Businessmen Reading Blueprints in Empty Warehouse
How Do Tariffs Protect Domestic Industries?
Why Delaware Is Considered a Tax Shelter
Ability-to-Pay Taxation: Definition and Examples
What Double Taxation Is and How It Works
Paperwork
What Is the Tax-to-GDP Ratio? Definition, and What Is a Good One?
Senior man working in a greenhouse
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
World map
Foreign Account Tax Compliance Act (FATCA): Definition and Rules
Caucasian politicians talking in capitol building
Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)
Tax-Advantaged
Last will and testament
What Is the Generation-Skipping Transfer Tax (GSTT) and Who Pays?
Ronald Reagan Giving Campaign Speech
Economic Recovery Tax Act of 1981 (ERTA)
Pump Priming
What Are Common Reasons for Governments to Implement Tariffs?
Surtax
Office manager chatting with a colleague in an office
IRS Publication 15-A: Employer's Supplemental Tax Guide
Close Up of Toronto City Skyline with Dramatic Sky near Sunset
Canada Revenue Agency (CRA)
Street in City of London with Royal Exchange, Bank of England and new modern skyscrapers, England, UK
Advance Corporation Tax (ACT)

Introduction to Fiscal Policy