Fiscal Policy

In economics and political science, fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy. According to Keynesian economics, when the government changes the levels of taxation and government spending, it influences aggregate demand and the level of economic activity. Fiscal policy is often used to stabilize the economy over the course of the business cycle.

Changes in the level and composition of taxation and government spending can affect the following macroeconomic variables, amongst others, in an economy:

  • Aggregate demand and the level of economic activity;
  • Savings and investment in the economy;
  • Income distribution

Fiscal policy can be distinguished from monetary policy, in that fiscal policy deals with taxation and government spending and is often administered by an executive under laws of a legislature, whereas monetary policy deals with the money supply, lending rates and interest rates and is often administered by a central bank.

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