What is "fiscal policy"

n. (context economics English) Government policy that attempts to influence the direction of the economy through changes in government spending or taxes.

n. a government policy for dealing with the budget (especially with taxation and borrowing)

In economics and political science, fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy. According to Keynesian economics, when the government changes the levels of taxation and governments spending, it influences aggregate demand and the level of economic activity. Fiscal policy can be used to stabilize the economy over the course of the business cycle.

The two main instruments of fiscal policy are changes in the level, composition of taxation, and government spending in various sectors. These changes can affect the following macroeconomic variables, amongst others, in an economy:

• Aggregate demand and the level of economic activity;
• Savings and Investment in the economy
• The distribution of income

Fiscal policy can be distinguished from monetary policy, in that fiscal policy deals with taxation and government spending and is often administered by an executive under laws of a legislature, whereas monetary policy deals with the money supply, lending rates and interest rates and is often administered by a central bank.