The phrase, Fiscal Policy refers to the measures taken by the government to influence an economy through purchasing goods and services from businesses and collecting taxes.
It also refers to the economic motive underlying the choices on how to spend the money. Whenever the government makes financial choices, it must take into account the impact on enterprises, consumers, international markets, and other relevant parties.
When it comes to fiscal policy, the government has two options -
- Taxation
- Government spending
The first measure is the collection of taxes on company and personal income, capital gains, real estate, and sales. Taxation generates the income that allows the government to function.
The second tool is government spending—funds are directed into subsidies, welfare programs, public works, infrastructure projects, and government jobs. Government spending puts more money back into the economy which increases demand for products and services.
The government may use this policy to stimulate the economy. For doing so, they may cut taxes and increase spending when necessary; usually, they spend on construction projects or infrastructural development projects which generate employment and cash, as well as on social services.
If the economy is performing well, it may be possible to cut expenditure and raise taxes. Businesses make enough jobs during these periods for officials to lessen their reliance on private-sector products and services.
Use of this term in a sentence
- Fiscal policy is generally used by the government to achieve sustainable growth while reducing poverty.
- The fiscal policy helps the government to adjust tax rates and spending levels to monitor the financial influence on the nation’s economy.