Fiscal Policy
Government use of spending and taxation to influence the economy.
What is Fiscal Policy?
Fiscal policy refers to the use of government spending and taxation to influence economic activity. Expansionary fiscal policy — increasing spending or cutting taxes — stimulates growth and is typically used during recessions. Contractionary fiscal policy — cutting spending or raising taxes — slows growth and is used to combat inflation or reduce deficits. Fiscal policy is set by elected governments and operates alongside monetary policy, which is controlled by central banks. The effectiveness of fiscal policy is debated among economists, with key questions around multiplier effects, crowding-out, and debt sustainability.
Example
The US CARES Act (2020) injected approximately $2.2 trillion in fiscal stimulus into the economy during the COVID-19 recession through direct payments, enhanced unemployment benefits, and business loans — the largest peacetime fiscal intervention in US history.