Fiscal policy is a term used to describe how authorities adjust the tax rates and spending levels of a country. It allows them to monitor and ultimately influence the economy of a nation by defining how public funds are collected and used.
In other terms, fiscal policies are used alongside monetary policies to change the direction of an economic and to maintain its stability. They can also stabilize the rate of growth of a country and cause positive effects in the employment rates and other socioeconomic indices.
An example of fiscal policy is the increased government spending and tax cuts, which are aimed at increasing aggregate demand while at the same time drawing down on the surpluses of the budget. The implementation of fiscal policies impacts different people in an economy. The procedure is based on the premise that when governments increase or decrease public spending and tax levels, they can influence macroeconomic productivity.
The influence can be beneficial to an economy in several aspects. For instance, by increasing employment rates, controlling inflation, and maintaining a value of money that is relatively healthy. However, it may also cause negative effects if not implemented properly – especially in countries with high rates of corruption.
Taxes are at the core of most fiscal policies. Mainly because they influence how much money the government has available for each area of society. Taxes may also influence how much money a citizen is willing to spend.
In such a context, policymakers often face one major challenge: deciding how much involvement the authorities can and should have in the economy. While this is a topic of strong debate, some economists and political scientists believe that it is necessary to have at least a certain degree of government interference to sustain a healthy society.
Summing up, fiscal policies allow the government to create changes in the tax system and economy of a country by influencing aggregate demand, inflation, consumption, and employment rates.