Fiscal Policy

Fiscal Policy Fiscal Policy refers to the use of government spending, taxation, and borrowing to influence a country’s economic conditions. It is one of the key tools used by the government to manage economic growth, control inflation, reduce unemployment, and stabilise the economy. Fiscal policy operates in two main forms: Expansionary Fiscal Policy: Involves increasing government spending or reducing taxes to stimulate economic growth during a slowdown or recession. Contractionary Fiscal Policy: Involves reducing government expenditure or increasing taxes to control inflation and curb excessive demand. The objective is to achieve a balanced and sustainable economy, ensuring steady growth while maintaining price stability and employment levels.

Example: During an economic downturn, the government may increase infrastructure spending and cut income taxes to boost demand, create jobs, and encourage investment — an example of expansionary fiscal policy.