Fiscal policy refers to the way governments attempt to influence their country's macroeconomic performance by taxing their citizens and spending that money on public programs, usually with the aim of stimulating economic growth. It is often thought of as the counterpart to monetary policy, which seeks to influence the country's money supply through setting interest rates.
Governments can use fiscal policy to exert more direct control over its national economy particularly through changes in taxation, which directly affect the amount of disposable income its citizens have available. Likewise, increased government spending can directly affect the economy by putting more money into circualtion, although this usually takes longer to affect the economy than changes in tax policy. Monetary policy, by contrast, can influence the economy mainly by lowering borrowing costs but as the recent credit crisis has demonstrated, this course of action has limited effectiveness.
- Fiscal policy definition. InvestorWords.com.