What is fiscal policy?
Fiscal policy is the use of government spending and tax policies. These can influence economic conditions, especially macroeconomic conditions i.e., how markets, businesses, consumers, and governments behave.
These conditions take into consideration things like the aggregate demand for goods and services, employment, inflation, and economic growth.
Expansionary fiscal policy is largely based on the ideas of economist John Maynard Keynes (1883-1946) who argued economic recessions are due to a deficiency in consumer spending and business investment. Keynes therefore advocated for increased government spending and lower taxes to encourage demand and stimulate economic activity.
In contrast, to tackle inflation, the government can raise interest rates or cut spending to slow down the economy – known as contractionary fiscal policy.
Fiscal policy differs from monetary policy, which is typically enacted by central bankers rather than elected government officials.