Fiscal policy looks at how government spend their money and how they control their taxes
There are 2 types of fiscal policy:
Contractionary fiscal policy
Where the government reduce spending and / or when they make taxes higher, they try to increase its PSBR( public sector borrowing requirement) to fund the tax drops they also do this to reduce its surplus on its budget for the fiscal year.
Expansionary fiscal policy
Where the government cut taxes or increase government spending
They will increase the amount the government borrows to fund the expenditure
Government Expenditure
Government expenditure covers all spending by the public sector. This includes transfer payments which are made from tax payers and benefits recipients.
The government spends money on many things including:
- Education
- Defence
- Healthcare
- Infrastructure
- Police
Fiscal Policy and Microeconomic Influences
As well as impacting the macroeconomy fiscal policy also has microeconomic impacts.
Taxation influences peoples incentives to work – if taxation increases it means people have to work harder for the same money, if it decreases people have to work less hard for the same money. Taxation and benefits can also create the poverty trap which mean it is often not much better financially for an individual to work.
Budgetary Balance
Budgetary balance is where government expenditure and taxation are equal. If taxation does not meet expenditure requirements then the government have to borrow money.
Changes to Public Expenditure
If the level of public expenditure in the economy changes it impacts public services and their provision – this may include cuts in education or healthcare or lower than inflationary pay rises in these areas (Gordon Brown did this in March 2007)
It can also influence the benefits system by making it more difficult or easier to claim benefits
