Governments use fiscal policy tools to control economies, including spending policies and revenue generation plans. Widely used tools to encourage growth include government-backed loan programs, grants, tax incentives, and job creation schemes. Fiscal policy tools can also be used to fight inflation, and tariffs can impact the economy of other nations.
Governments use fiscal policy tools to try to control local, national and even international economies. Policy instruments fall into two main categories: spending policies and revenue generation plans. The former include initiatives to strengthen consumer or business lending, as well as plans to raise living standards by injecting money into development and revitalization projects, while the latter include various types of taxes and tariffs that governments assess on consumers and commercial enterprises.
Growth occurs when spending increases and the economy expands, but for growth to occur, consumers and businesses must have access to credit. Widely used fiscal policy tools that are designed to encourage growth include government-backed loan programs. In many cases, governments finance or insure consumer mortgages with the intention of making these loans more accessible to people living on modest budgets. As home financing options become more readily available, competition for affordable homes increases and this drives up prices. Grants and tax incentives are also sometimes provided to prospective homeowners; these fiscal policy tools also drive up house prices and this stimulates growth.
During times of inflation, high levels of unemployment can inhibit economic growth. As a result, many governments fund unemployment insurance programs designed to ensure that consumers have sufficient funds to cover their daily costs even when they are unemployed. These programs help not only the recipients but also the wider economy because the money these people spend creates profits for private companies. Profitable businesses tend to expand in order to maximize profits, and expansion often takes the form of job creation. Thus, widely used fiscal policy tools include job creation schemes and schemes that offer businesses cheap loans and tax incentives.
In addition to trying to stimulate growth, fiscal policy tools can also be used to fight inflation. Governments generate revenue but assess various taxes on businesses and consumers. As taxes rise, discretionary spending decreases as consumers have to spend a larger percentage of their money on basic necessities. Similarly, taxes also affect businesses, which means governments can use these tax policy tools to prevent overly aggressive businesses from expanding too quickly.
Fiscal policy tools affect the domestic economy but tariffs are tools that can impact the economy of other nations. Tariffs are usually imposed on imported goods, and as tariffs rise, the cost of buying goods overseas increases. Foreign manufacturers have to raise prices to cover the cost of these taxes or eliminate other expenses. If these companies raise prices, the tariffs have created inflation, but if these companies reduce costs, the tariffs can lead to job losses abroad. Thus, tariffs are among the fiscal policy tools that have the most far-reaching impact.
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