Types of Fiscal Policy

Types of Fiscal Policy

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Fiscal policy is classified into two categories:

1. Expansionary - fiscal policy refers to policies that reduce taxes or increase government expenditure in order to boost demand and economic growth. These measures are typically implemented during periods of economic recession or slowdown to raise demand and encourage economic activity. Governments can implement expansionary fiscal policy in several ways:

               a) Increase government expenditure: Government spending may be increased in a variety of sectors, including infrastructure, education, and defence. This has the potential to increase economic demand and create jobs.

               b) Reduce taxes: In order to increase disposable income and encourage expenditure, governments may reduce taxes on people or enterprises. This might boost demand and support economic growth.

               c) Deploy transfer payments: Transfer payments, such as social security or unemployment benefits, that place money in the hands of people most inclined to spend it, are another approach for governments to stimulate demand.

It is vital to remember that an expansionary fiscal strategy may result in bigger budget deficits since the government spends more than it collects in taxes. This might be a concern if the deficit gets too great, resulting in increasing levels of government debt.

2. Contractionary Fiscal Policy - Methods known as contractionary fiscal policy entail raising taxes or reducing government expenditure in order to lessen demand and control the economy. During moments of inflation or economic boom, these methods are frequently used to reduce demand and prevent economic overheating. Governments can implement a contractionary fiscal policy in several ways:

               a) Reduce government spending: Governments may cut spending on a variety of items and services, including infrastructure, training, and defence. This might reduce economic demand.

               b) Imposition of Taxes - Governments can impose taxes on citizens or companies to limit disposable income and discourage spending. This can reduce demand and cause the economy to stall.

               c) Deploy austerity - Governments can also take austerity measures to reduce expenditure and demand, such as lowering social safety net programmes.

Given that the government is receiving more money in tax collections than it is spending, contractionary fiscal policy can result in reduced budget deficits or even budget surpluses. Contractionary fiscal policy, on the other hand, can induce an economic slowdown or recession since it reduces demand.