What are the basic tools of fiscal policy?

Fiscal policy is one of the two main types of control that the government or its agencies can perform over the economy. The main instruments of fiscal policy are taxation and expenditure; In contrast, monetary policy includes availability and cost of money or more specifically credit. Fiscal policy tools can achieve or at least try to achieve economic and political goals. All fiscal policy instruments eventually serve to answer two questions: how much the government should spend and how it should finance these expenditures.

The decision on how much you spend can depend on political and economic sites. As a very gross simplification, right -wing governments tend to believe in lower government expenditures and leave more elements of the economy to be determined by free markets. On the other hand, the left wing government tends to believe in higher government expenditures, often for social goals. It is important to realize that the terms such as the left and right wings are often relative terms. In many casesBianed by the main and right -wing parties in one country may seem relatively close to the policy and economy of another country.

In most cases, government expenditures are mainly funded by tax. This is another example of how fiscal policies can have social or political purpose, as well as an economic goal. In addition to mere decision -making on how much tax should be raised overall, the government can use tax as a form of redistribution by taxing richer people to finance payments in social security. It can also use tax to encourage or discourage social behavior, such as strongly taxing tobacco to try to reduce the level of smoking.

There are other ways of raising money for expenses. These include lending money, using the existing reserve in the past and selling assets owned by the government. Over time, these methods can build a public deficit and thus rISING DEBT. This may affect the government's decision on fiscal policy instruments: for example, a political party that is fundamentally believed in high -funded taxes may decide to spend less than an increase in tax to reduce the deficit.

Fiscal policy tools can be used along with currency policy instruments. These include the determination of basic rates that have in most economies, have a knock-on impact on rates that banks charge to lend to the public or businesses. The aim of these policies is usually to manage the level of inflation, the theory is that higher rates mean that people spend more mortgages and other loans, and therefore have less spend on goods. While some governments are using fiscal and monetary policy together, others are responsible for independent monetary authority, such as the National Bank.