Fiscal policies are government decisions related to spending, borrowing, and tax assessment, aimed at controlling economic activity and improving the economy as a whole. They differ from monetary policies, which control interest rates and the national money supply. Fiscal policy objectives include reducing unemployment and poverty, improving living standards, and eliminating deficits and surpluses. Governments can raise money through taxes and bonds, but increasing spending will cause taxes to rise in the long run.
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 policies are driven by government attempts to control economic activity. Some people confuse fiscal policy with monetary policy. Fiscal policies generally relate to government spending, borrowing, and tax assessment, 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 levels of growth and unemployment, but fiscal policies are policy decisions related to government budgets and how public funds are used to shape the economy. Fiscal policy objectives 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 benefit programs that improve the standard of living of large numbers of people. On the other hand, a government can try to improve economic conditions by reducing taxes so that companies have more money to hire employees, as this can lower unemployment and improve living standards.
Although the objectives of fiscal policy are generally related to improving the economy as a whole, some politicians attempt to implement policies designed to improve the financial situation of the real government. Some governments base fiscal policies around the notion that governments should not just support job creation, but should take direct responsibility for job creation. In some countries, governments assess a wide range of taxes and some of the revenues are used to create jobs for civil servants who may work for the security services, the post office or national health care providers. Opposition parties can campaign for changes in tax policy that result in a reduction in the government’s workforce and lower taxes.
In addition to taxes, government agencies can also raise money by issuing debt instruments called bonds. Typically, bonds are backed by tax money, meaning that bondholders receive interest payments derived from tax revenues. Therefore, a governing government that increases spending will cause taxes to rise in the long run, even if 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. Nevertheless, deficits and surpluses are not uncommon, and the fiscal policy objectives of some political groups include the elimination of deficits and surpluses. A deficit can be erased by increasing tax revenues, while a surplus can be eliminated by increasing short-term spending or returning tax revenues to taxpayers.
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