Fiscal Policy Overview

Fiscal Policy

• Fiscal policy is the government's approach to managing its revenue, spending, and debt to achieve specific economic objectives.
• The term "fisc" signifies treasury, making fiscal policy the management of government funds.
• Fiscal policy aims to influence a nation's economic activities.

Objectives of Fiscal Policy

• Full Employment: Achieving a scenario where everyone who wants to work can find a job.
• Price Stability: Keeping inflation under control, preventing drastic fluctuations in prices.
• Reduction of Economic Inequality: Decreasing the gap between the rich and the poor, promoting a more equitable distribution of wealth.
• Economic Development: Fostering growth in the economy, improving standards of living for all citizens.

Methods or Tools of Fiscal Policy

• Taxation Policy: The system used by the government to collect revenue through taxes.
• Government Expenditure Policy: The allocation of government funds for various programs, projects, and services.
• Public Debt Policy: Managing how the government borrows money and uses it for its different initiatives.
• Deficit Financing: Borrowing money to fund government spending when revenue is insufficient.

Automatic Stabilizers vs. Discretionary Fiscal Policy

• Automatic Stabilizers: Government programs that automatically adjust spending and taxes with economic fluctuations (like unemployment benefits rising during recessions).
• Discretionary Fiscal Policy: Conscious decisions made by the government to change spending or tax levels to achieve specific economic goals.

Budget Deficits, Surpluses, and the National Debt

• Budget Deficit: When government spending exceeds tax revenue, the difference is the deficit, which is financed by borrowing.
• National Debt: The total amount of government debt, including past and present borrowing.
• Budget Surplus: When government revenue exceeds spending, the difference is the surplus, often used to reduce the national debt.
• Balanced Budget: When government revenue and spending are equal for a specific year.

Expansionary and Contractionary Fiscal Policy

• Expansionary Fiscal Policy: Increasing government spending and/or decreasing taxes to stimulate the economy, leading to a larger budget deficit or smaller surplus.
• Contractionary Fiscal Policy: Decreasing government spending and/or increasing taxes to slow down inflation or reduce deficits, leading to a smaller deficit or larger surplus.