Fiscal policy

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.