Fiscal policy is the use of government spending and taxation to influence a country's economy, particularly macroeconomic conditions such as aggregate demand, employment, inflation, and economic growth
. It is a key tool governments use to stabilize the economy over the business cycle by adjusting tax rates and public spending. The concept of fiscal policy is largely based on the ideas of economist John Maynard Keynes, who argued that government intervention through fiscal measures can help regulate economic output and stabilize fluctuations in the economy, especially during recessions or periods of weak demand
. There are three main stances of fiscal policy:
- Expansionary fiscal policy: Involves increasing government spending or decreasing taxes to boost aggregate demand and stimulate economic growth, typically used during recessions
- Contractionary fiscal policy: Involves decreasing government spending or increasing taxes to reduce inflation and cool down an overheating economy
- Neutral fiscal policy: When government spending and taxation are balanced in a way that does not significantly influence economic activity
Fiscal policy differs from monetary policy, which is managed by central banks and involves controlling the money supply and interest rates. Fiscal policy decisions are made by elected government officials and directly affect government budgets, borrowing, and taxation
. In summary, fiscal policy is a government’s strategic use of spending and taxation to influence economic conditions, aiming to promote sustainable growth, control inflation, and reduce unemployment
