Fiscal policy

Fiscal policy includes any measure that the national government takes to influence the economy by budgetary means, such as increasing or decreasing public spending and taxes. Both fiscal and monetary policy can be used to influence the economy’s short-term performance.

Low interest rates or taxes, for example, might stimulate short-term growth in the economy, while trimming spending and increasing government revenues via tax rises tends to dampen growth. However, there can be long delays between policy decisions and any visible impact on the economy, and stimulative or restrictive policies can also be self-defeating in the long run if they are applied persistently and indiscriminately.

The government’s job is to combine fiscal and monetary policies in such a way that they will foster steady growth but avoid inflation.