An analysis of fiscal policy: the role of government
-
Tammy Da Costa, CFTe®
-
-
- Trading
- Education
What is fiscal policy?
Fiscal policy is a tool used by governments to stimulate or stabilise an economy during periods of financial uncertainty or economic fluctuations.
When markets are experiencing fluctuations that could threaten the stability of the economy, policymakers may adjust government spending and taxes to influence spending patterns.
However, effective implementation of fiscal policy requires careful consideration of various factors, including economic conditions, policy objectives, and public debt management.
Fiscal policy tools and measures
Fiscal policy is implemented by the government through the annual budget process. It involves measures such as changing tax rates, increasing or decreasing government spending and adjusting government transfer payments to individuals or households through social welfare programs.
Measures undertaken by the government can be categorised as either expansionary (also known as quantitative easing) or contractionary (quantitative tightening).
Expansionary fiscal policy explained
Fiscal policy plays a crucial role in fostering long-term economic growth. By allocating resources effectively towards infrastructural development, research and development, education, and other key sectors of the economy, governments can lay the foundation for sustainable growth.
Additionally, tax incentives and subsidies can spur private investment, encourage entrepreneurship, and create employment opportunities. By adopting prudent fiscal policies that encourage private sector investment and innovation, countries can achieve higher productivity, increased competitiveness, and improved economic performance.
Contractionary fiscal policy explained
Conversely, during periods of overheating or inflationary pressures, contractionary fiscal policy, including decreased government spending and increased taxes, can help curb excessive spending, control inflation, and maintain price stability.
Fiscal Policy Objectives: Expansionary vs Contractionary
| Expansionary | Contractionary |
|---|---|
| Stimulate economic growth | Control inflation |
| Increase employment | Reduce excessive economic growth |
| Boost aggregate demand for goods and services | Maintain exchange rate stability |
| Provide support during economic downturns | Reinforce fiscal policy |
| Achieve macroeconomic stability | Restore confidence and credibility |
What's your Trading Style?
No matter the playing field, knowing your style is the first step to success.
Conclusion:
The implementation of fiscal policy can take various forms depending on the economic context and policy goals.
When policymakers actively adjust government spending and taxation in response to economic conditions, this is referred to as discretionary fiscal policy.
Alternatively, when progressive tax systems or social safety nets are used to provide stimulus or restraint during economic fluctuations, this is referred to as automatic fiscal stabilisers.
Ultimately, by employing prudent fiscal measures, governments can enhance macroeconomic stability, improve living standards, and create an environment conducive to inclusive and sustainable development.
Past performance does not guarantee or predict future performance. This article is offered for general information and does not constitute investment advice. Please be informed that currently, Skilling is only offering CFDs.
