Fiscal policy
Fiscal policy uses government taxation, spending and related budget decisions to influence the economy and pursue public objectives. Changes can affect aggregate demand, incentives, income distribution and productive capacity. Expansionary measures generally increase demand relative to the alternative; contractionary measures generally restrain it. Effects depend on timing, financing, spare capacity, confidence and how households and businesses respond.
Worked example
A government increases infrastructure spending during a downturn. This directly supports demand and may improve future capacity, but the overall impact depends on implementation, imports, funding and whether other activity is displaced.
Common mistake
Do not confuse fiscal policy with a central bank’s interest-rate decision or assume every tax cut increases total spending by its full amount.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | BT | Direct | September 2026–June 2027 |
| FIA | FBT | Direct | September 2026–June 2027 |