Fiscal policy involves government intervention in taxation and government spending to provide growth and stability to an economy. Short-term policies stabilize struggling economies, while long-term policies aim for sustainable growth and poverty reduction. The role of fiscal policy has changed throughout history, with governments stepping in during economic crises.
The role of fiscal policy is to provide growth and stability to the economy of a nation or region of the world through government intervention in taxation and adjustment of government spending. Fiscal policy often takes on a central role in a country’s economy when an economic crisis occurs and the government feels that stabilization is needed. The long-term fiscal policy objectives include the reduction of poverty for a nation’s citizens and the sustainable growth of an economy.
Government intervention in an economy can take two forms – fiscal policy or monetary policy. Fiscal policy is controlled by government bodies and departments, while monetary policy is controlled by banks that change interest rates and sell government bonds. The role of fiscal policy is to raise or lower taxes and government spending, depending on the needs of the economy. When an economy slows down, a government can try to stimulate it by increasing spending and cutting taxes, giving citizens a larger amount of money to spend. Increased spending on more disposable income is returned to the government in taxes levied on sales at the local and national levels.
In the short term, the role of fiscal policy is to stabilize a struggling economy by increasing spending and making temporary tax cuts. Short-term tax cuts usually have a minimal impact on the economy because people who receive such a cut usually save the increased amount of money. Money saved is used for a perceived return to economic hardship when tax changes return to previous levels. Economic growth is the long-term goal of fiscal policies introduced by a government at sustainable levels that do not allow an economy to grow at uncontrollably fast or slow levels.
Government fiscal policies often include stabilizers that automatically kick in when the economy grows or slows at alarming levels. An economic downturn sees more government spending on unemployment benefits and health care, with government spending adjusted at small levels without legislative interference. A slowing economy is often stimulated in small ways by tax cuts to promote spending.
Throughout history, the role of fiscal policy has changed due to the needs of a country at a specific time. Prior to the Great Depression of the 1930s, most governments did not significantly interfere with the functioning of their economy, but allowed market forces to govern economic growth. The worldwide economic meltdown of the 1930s prompted governments to step in and establish fiscal policies to provide stabilization. By the end of the 20th century, government policies in most countries had returned fiscal control to the stock market and investment markets, followed by the economic downturn of the first decade of the 21st century, which led to greater government involvement in politics. Supervisor.
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