Fiscal policy involves government spending, borrowing, and taxes to control economic activity, with goals including reducing unemployment and encouraging economic growth. Governments may use taxes to fund subsidy programs or create jobs for civil servants. Deficits and surpluses are common, and can be eliminated through increased tax revenues or short-term spending.
National and regional governments often implement various policies to influence the direction of the economy. While the short-term goals of fiscal policy may vary, all fiscal policy is driven by government attempts to control economic activity. Some people confuse fiscal policy with monetary policy. Fiscal policies generally refer to government spending, borrowing and the assessment of taxes, while monetary policies control interest rates and the national money supply.
The ultimate goals of fiscal policy include reducing unemployment and encouraging economic growth. Monetary policies can also influence growth and unemployment levels, but fiscal policies are policy decisions related to government budgets and how public funds are used to shape the economy. Fiscal policy goals for a regional government may include reducing the number of households living below the poverty line. The government may decide to alleviate poverty by raising taxes to fund free health care programs, housing projects, and various other types of subsidy programs that improve living standards for large numbers of people. Conversely, a government may try to improve economic conditions by reducing taxes so that businesses have more money to spend on hiring employees, as this can reduce unemployment and improve living standards.
While fiscal policy goals are generally related to improving the economy as a whole, some politicians try to implement policies that are designed to improve the current government’s financial situation. Some governments base fiscal policies around the idea that governments should not only support job creation, but should take direct responsibility for job creation. In some countries, governments assess a wide range of taxes and some revenues are used to create jobs for civil servants who may work for the national security services, post office or health workers. Opposition parties can campaign for fiscal policy changes that involve a reduction in the government workforce and lower taxes.
In addition to taxes, government agencies can also raise funds by issuing debt instruments called bonds. Typically, bonds are backed by tax funds, which means bondholders receive interest payments that come from tax revenues. Thus, a ruling government that increases spending will raise taxes in the long run even though one of the stated short-term goals of its fiscal policy is to keep taxes low.
In theory, governments as non-profit organizations should have balanced budgets. Nonetheless, deficits and surpluses are not uncommon, and the fiscal policy goals of some political groups include the elimination of both deficits and surpluses. A deficit can be canceled by increasing tax revenues while a surplus can be eliminated by increasing short-term spending or by returning tax revenues to taxpayers.
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