Fiscal policy
Fiscal
policy refers to the use of the government budget to influence economic activity.
In
economics and political science, fiscal policy is the use of government revenue
collection (taxation) and expenditure (spending) to influence the
economy.[1] The two main instruments of
fiscal policy are government taxation
and changes in the level
and composition of
taxation and government
spending can affect
the following variables in the economy:
Aggregate
demand and the level of economic activity; The pattern of resource allocation;
The
distribution of income.
Stances
of fiscal policy
The
three main stances of fiscal policy are:
Neutral
fiscal policy is usually undertaken when an economy is in equilibrium.
Government spending is fully funded by tax revenue and overall the budget
outcome has a neutral effect on the level of economic activity.
Expansionary fiscal
policy involves government
spending exceeding tax
revenue, and is
usually undertaken during recessions.
Contractionary fiscal
policy occurs when
government spending is lower
than tax revenue, and is usually undertaken to pay down
government debt.
However,
these definitions can be misleading because, even with no changes in spending
or tax laws at all, cyclic fluctuations of the economy cause cyclic
fluctuations of tax revenues and of some types of government spending, altering
the deficit situation; these are not considered to be policy changes.
Therefore, for purposes of the above
definitions,
"government
spending" and "tax revenue"
are normally replaced
by "cyclically adjusted
government spending" and "cyclically adjusted tax revenue".
Thus, for example, a government budget that is balanced over the course of the
business cycle is considered to represent a neutral fiscal policy stance.
Governments
spend money on a wide variety of things, from the military and police to
services like education and healthcare, as well as transfer payments such as
welfare benefits. This expenditure can be funded in a number of different ways:
Taxation
Seignior age, the benefit from printing money borrowing money from the
population or from abroad Consumption of fiscal reserves
Sale
of fixed assets (e.g. land