Fiscal policy, also known as government budget, refers to the government’s decisions and actions related to its revenue collection, expenditure, and debt management. It is one of the primary tools used by governments to achieve their macroeconomic objectives, such as economic growth, price stability, and full employment.
Fiscal policy is formulated and implemented by the government, which can influence the economy through various measures, such as changes in tax rates, government spending, and borrowing. When the government spends more than it collects in revenue, it runs a budget deficit, and when it collects more than it spends, it runs a budget surplus.
The government can use fiscal policy to stimulate economic growth during a recession by increasing spending and cutting taxes, which will increase aggregate demand and stimulate economic activity. Alternatively, the government can use fiscal policy to reduce inflationary pressures by decreasing spending and increasing taxes, which will reduce aggregate demand and slow down economic activity.
Fiscal policy can also impact the distribution of income in society. For instance, the government can increase social welfare spending to support the poor and vulnerable, or it can introduce progressive taxation to ensure that the rich pay a higher share of their income in taxes.
In summary, fiscal policy is an essential tool for governments to manage their economies, address social issues, and achieve their macroeconomic objectives.
