Fiscal policy refers to the government’s use of spending, taxation, and borrowing to influence the economy. It is one of the two main tools of economic policy, the other being monetary policy.
The main goals of fiscal policy are to promote economic growth, stability, and full employment while maintaining price stability. Fiscal policy can be expansionary, contractionary, or neutral, depending on the government’s goals and the state of the economy.
Expansionary fiscal policy involves increasing government spending, lowering taxes, or both, in order to stimulate economic activity and increase employment. Contractionary fiscal policy involves decreasing government spending, raising taxes, or both, in order to slow down inflation and prevent the economy from overheating. Neutral fiscal policy involves keeping government spending and taxation at the same level in order to maintain stability.
Fiscal policy can also be used to address income inequality, promote social welfare, and invest in public goods such as infrastructure, education, and healthcare. However, the effectiveness of fiscal policy depends on a number of factors, including the size and flexibility of the government budget, the responsiveness of the economy to changes in fiscal policy, and the political environment in which it is implemented.