What are fiscal policies?

Fiscal policies are governmental strategies involving the use of spending and taxation to influence the economy. These policies are primarily implemented to manage economic activity, particularly during times of recession or inflation. Governments employ fiscal policy to achieve economic goals such as promoting growth, reducing unemployment, and controlling inflation.

Key components of fiscal policy include adjusting tax rates and government spending levels. For example, during a recession, the government may lower taxes and increase spending to stimulate demand and economic activity. Conversely, in times of inflation, it may raise taxes or reduce spending to cool down an overheated economy^{[1][2][4][5][6]}.

Fiscal policy was significantly shaped by the ideas of economist John Maynard Keynes, who advocated for countercyclical approaches. He believed that government intervention could stabilize the economy by influencing aggregate demand through fiscal measures. This approach encourages deficit spending during downturns and surpluses during periods of growth^[1][5][6].

Governments can utilize mandatory spending (such as Social Security), discretionary spending (like defense), and supplemental spending for urgent budget needs as part of their fiscal policy framework. Additionally, fiscal policy can be classified into expansionary or contractionary types, where expansionary policy aims to boost the economy, while contractionary policy seeks to reduce spending and increase taxes to combat inflation^[2][3].

In summary, fiscal policies serve as vital tools for governments to maintain economic stability and promote sustainable growth^[4][5][6].