Fiscal policy

Fiscal policy includes any measure that the national government takes to influence the economy by budgetary means.

Fiscal policy includes any measure that a government takes to influence the economy by budgetary means, such as increasing or decreasing public spending as well as raising or lowering taxes.

Both fiscal and monetary policy (which is under the jurisdiction of central banks) can be used to influence the economy's short-term performance. Central banks cutting interest rates or governments cutting taxes, for example, might stimulate short-term growth in the economy, while cutting spending and raising taxes (or interest rates) tends to dampen growth.

However, there can be long delays between policy decisions and any visible impact on the economy, and both stimulative and restrictive policies can be self-defeating in the long run if they are applied persistently and indiscriminately.

Most governments and central banks aim to combine fiscal and monetary policies in such a way as to foster steady growth but avoid inflation. In the decade since the financial crisis, the line between fiscal and monetary policy has become increasingly blurred.

Put simply, fiscal policy tends to be redistributive (taking money from one group to give to another) whereas monetary policy is applied economy-wide, which is why fiscal policy is kept under the direct control of governments, and therefore voters.

However, radical central bank policies, such as quantitative easing (money printing, essentially) have had very obvious redistributional consequences (in effect, making the asset-rich even richer), without ever having been explicitly voted for.

Recommended

Make sure your pension savings don't breach the lifetime allowance
Pensions

Make sure your pension savings don't breach the lifetime allowance

Don’t forget the lifetime allowance when reviewing your pension planning – breaching it could prove very costly, says David Prosser.
7 Jan 2022
The Budget brought a short-term reprieve for investors
Budget

The Budget brought a short-term reprieve for investors

The Budget spared investors for now – so make sure you use up all your your allowances.
5 Nov 2021
Budget 2021: the chickens come home to roost
Budget

Budget 2021: the chickens come home to roost

Rishi Sunak delivered his budget today amid a fragile and uncertain time. Max King analyses.
27 Oct 2021
Budget 2021: Here is what Chancellor Rishi Sunak announced
Budget

Budget 2021: Here is what Chancellor Rishi Sunak announced

Rishi Sunak delivered his much anticipated Budget today. David Prosser explains what it means for you.
27 Oct 2021

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022