Fiscal Policy – AS/A LEVELS/IB/IAL

Fiscal Policy – AS/A LEVELS/IB/IAL

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Fiscal Policy

This is the manipulation of government spending and taxation by the government.

Fiscal Policy is also used to help achieve the governments macro-economic objectives.

Fiscal Policy is also the governments budget policy. They decide on how, where and what to spend on key areas of the economy e.g. healthcare and education. They must also decide on tax rates for individuals and firms.

Key terms – Fiscal Policy

Expansionary/ Reflationary/ Loose Fiscal Policy

This occurs when government spending is greater than taxation.

Contractionary/ Deflationary/Tight Fiscal Policy

This occurs when taxation is greater than government spending.

Fiscal (Budget) Deficit

This occurs when government spending is greater than tax revenues collected.

Fiscal (Budget) Surplus

This occurs when tax revenues are greater than government spending.

Automatic (Fiscal) Stabilisers

During a recession government spending will automatically increase through benefit payments e.g. JSA. The government will also automatically receive less tax revenue due to less people being employed and paying taxes.

Discretionary (Fiscal) Policy

This occurs when the government purposely changes government spending or taxation.

Problems with Fiscal Policy

  • Time lags – Fiscal policy takes time to impact the economy.
  • The budget is set once a year compared to the economic cycle which is continually changing.
  • Poor information can lead to poor budget planning and decisions by the government.
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