This is government policy to decide how much, and on what, the government spends money on in the economy. In addition to decisions around government spending, fiscal policy also involves decisions on how they get the money in the first place! Can you guess where?
The answer is YOU! Or at the very least, people you know! The government collects money in the form of taxes. This includes income tax, corporation tax, VAT, environmental tax… all sorts!
Governments then record all of the information regarding how much they spend and how much they earn in the fiscal budget.
So what happens when a government spends more than they earn? A very good question! Just like individuals and businesses who overspend, governments will borrow money from the private sector, and even from other governments in order to balance their books. For more information on the implications of this, read this section on national debt.
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Key terms:
Fiscal Surplus – where the fiscal budget is positive. Government spending is less than earnings (mainly from tax)
Fiscal Deficit – where the fiscal budget is negative. Government spending is more than earnings (mainly from tax)
Expansionary Fiscal Policy – fiscal policy designed to stimulate the economy (spending ↑ tax ↓)
Contractionary Fiscal Policy – fiscal policy designed to dampen the economy (spending ↓ tax ↑)