If your taxes go up, that's likely due to your country's fiscal policy. If the federal government spends a load of cash on a program or department, that's also fiscal policy.
Fiscal policy is used to monitor and influence a nation's economy by adjusting taxes and spending levels. It's different than monetary policy – fiscal policy's sister strategy – which influences the country's money supply via the central bank.
The United States once took a hands-off or laissez-faire approach to fiscal policy. After the disaster of the Great Depression, the thinking on fiscal policy began to shift. Following the Second World War, the government decided to be more proactive regarding the economy and developed a fiscal policy that more closely monitored and influenced unemployment, business cycles, inflation and more. There are advantages and disadvantages of fiscal policy, but having one is essential to a nation.
Objectives of Fiscal Policy
The objectives of fiscal policy in under-developed countries are quite different than those of advanced countries. What are the benefits of fiscal policy and what does the U.S. government, in particular, want it to achieve?
Full employment: This is the ideal goal, so to this end, fiscal policy is designed to limit unemployment and underemployment. Public spending and public sector investment are key methods used to stimulate the economy and create jobs. Private spending can also be encouraged using tax breaks, tax credits and other incentives for companies to invest in communities and increase employment.
Economic growth: A growing economy is important to most countries, and fiscal policy has a hand in making sure this happens. Three factors that affect fiscal policy are taxation, public borrowing and deficit financing.
Maintain the inflation rate: The rate of inflation is the increase in the cost of goods and services over a period. If that gallon of milk cost you $1.00 one year, then $1.06 the next year, the rate of inflation is 3 percent. Ideally, fiscal policy aims to keep the rate of inflation no higher than 3 percent.
Benefits and Downsides of Fiscal Policy
If inflation gets too high, a government can use fiscal policy to help curb it. One way would be to increase taxes to eliminate money from the economy. Another method to decrease the money circulating in the economy would be to limit government spending.
Of course, monitoring the economy requires careful calibration, and things could go south, resulting in a sluggish economy and high unemployment. Fiscal policy needs to be fine-tuned to achieve its primary goal of creating a healthy and vibrant economy.
Heather Skyler is a business journalist and editor who has written for wide variety of publications, including Newsweek.com, The New York Times and Delta's SKY magazine. She has a bachelor's degree in English from Miami University and a master's degree in writing from the University of Washington in Seattle. Before writing for a variety of publications, she taught business writing in Seattle.