Fiscal, Monetary & Supply-Side Policy

Fiscal policy

Fiscal policy is the use of government spending and taxation to influence the economy.

Expansionary fiscal policy — higher spending and/or lower taxes → raises demand → boosts growth and cuts unemployment (but may cause inflation and a budget deficit).
Contractionary fiscal policy — lower spending and/or higher taxes → reduces demand → cuts inflation (but may raise unemployment).

Taxes are direct (on income/profit, e.g. income tax) or indirect (on spending, e.g. VAT). A progressive tax takes a larger proportion from higher incomes (e.g. income tax); a regressive tax takes a larger proportion from the poor (e.g. VAT).

A budget deficit is spending > tax revenue; a surplus is tax revenue > spending.