The fiscal policy represents government policies that influence macroeconomic conditions. Regulators attempt to improve unemployment rates, control inflation, stabilize business cycles, and influence interest rates to control an economy through a fiscal policy.
Fiscal policy is the government’s decision about how to use its budget. It is a mix of taxes, spending, and borrowing. It is a crucial part of macroeconomics because it can significantly impact an economy’s overall performance and stability, which affects everyone in society.
Fiscal policy is primarily based on British economist John Maynard Keynes (1883–1946), who believed that governments could change economic performance by adjusting tax rates and spending.
Impact of a Fiscal Policy
Everyone is impacted by the government’s decisions, as fiscal policy is difficult to avoid. Taxes are paid on wages and GST on goods and services. The tax is then used to fund public services, such as education and healthcare. The government also ensures that those in need get help through welfare payments. In addition, essential services that keep us safe such as law enforcement, would not be possible without taxation.
Types of Fiscal Policies
Expansionary Fiscal Policy
This type of fiscal policy involves higher spending and lower tax rates. Extra spending is financed by higher government borrowing. The aim is to increase aggregate demand in a depressed economy.
Contractionary Fiscal Policy
This policy involves government spending cuts and tax rises. The aim is to reduce inflationary pressure or reduce the budget deficit. However, this may cause lower economic growth.
Factors that affect Fiscal Policy
The government has two main fiscal levers, tax revenue and public spending. Tax revenue is collected by the government and is distributed by providing public services.
A fiscal policy is all about balancing these two factors. It is desirable to increase spending and reduce revenue soon to boost economic growth. However, one cannot indefinitely spend more than income as this would require ever more significant amounts of borrowing and debt.
Significant areas where the government spends money are: –
- Defense
- Education
- Health Care Sector
- Law and Order
- Core Government Services
- Transport and Communication
- Social Security Benefits
- Unplanned Expenditures
Measuring a Fiscal Policy
As the government taxes many things and spends on many areas, it is difficult to tell if they add or subtract from economic growth. The government’s operating balance (also termed fiscal balance) is the difference between its revenue and expenditure. If the budgetary balance increases, the government saves or takes money out of the economy. It is also known as fiscal surplus.
On the contrary, a government injects money into the economy if the fiscal balance decreases (or a deficit increases). It is also known as fiscal deficit.
It may seem that reducing the fiscal balance (i.e., a situation of budgetary deficit) would lead to economic growth. However, this is only true in the short term. If the government is persistently running deficits and spending more than it earns, it would have to borrow money to meet the shortfall. Accumulating more and more debt is not sustainable, as the government could become insolvent!
The Do’s and Don’ts of Fiscal Policy
The fiscal policy is one of the essential tools a government must use to achieve its goals. There are many do’s and don’ts that policymakers should follow when it comes to using fiscal policy to attain their goals.
Some of the dos and don’ts of fiscal policy are:-
Do’s:
- Promote economic growth.
- Increase income equality.
- Decrease unemployment.
- Decrease poverty rates.
- Reduce inequality in income distribution.
Don’ts:
- Increase inflation rates.
- Increase interest rates.
- Raise taxes too high on individuals and businesses.
Conclusion: How Fiscal Policy Affects You as a Citizen
Fiscal policy is the process of managing the country’s economy by influencing its level of spending, taxation, and debt.
The economy is a complicated system with many variables that affect it. Fiscal policy affects every citizen because it impacts their individual lives in different ways.
The government has a responsibility to help stabilize the economy and support citizens in times of need. However, there are times when fiscal policies can also harm citizens. The government can sometimes borrow from the public to pay its bills. If a nation borrows from the public, it may be unable to repay the debt and run into an economic crisis.
Thus, a fiscal policy can affect the economy and your finances.
