Fiscal policy
Fiscal policy is the use of government taxation and spending decisions to influence economic activity and manage public finances.
Government spending: Public expenditure on goods, services, transfers, and investment. Changes in public purchases and transfers directly alter demand and household income.
Fiscal stimulus: Expansionary government spending or tax reductions intended to raise economic activity. It is used to support demand when private spending weakens.
Monetary policy: Central-bank actions that influence interest rates, credit, and the supply of money. It is the other principal stabilization tool, controlled by central banks rather than budget authorities.
John Maynard Keynes: A British economist whose work reshaped theories of employment, output, and government intervention. His arguments made deficit spending a central response to deficient private demand.
Ricardian equivalence: The proposition that deficit-financed tax cuts may not raise demand if households save in anticipation of future taxes. It challenges the claim that borrowing-funded tax cuts reliably stimulate consumption.
Taxation: The compulsory collection of money by governments to finance public activity. Tax changes affect disposable income, incentives, and aggregate demand.
Austerity: Policies that reduce public spending or raise taxes to lower deficits or debt. It represents fiscal tightening, often adopted when debt or borrowing costs concern policymakers.
Discretionary fiscal policy: Deliberate tax or spending changes enacted in response to economic conditions. Unlike automatic stabilizers, it requires an explicit policy decision.
The General Theory of Employment, Interest and Money: John Maynard Keynes’s 1936 book explaining persistent unemployment through insufficient aggregate demand. It supplied a major theoretical foundation for countercyclical fiscal action.
Crowding out: The reduction in private investment or spending associated with increased government borrowing or activity. It is a potential offset to fiscal stimulus, especially when resources or credit are constrained.