Fiscal Policy


Fiscal policies refer to decisions made by the government regardingits spending and taxes with an aim to control the economy. Theeconomy is run by money, which emanates from firms, households, andthe public sector (Hansen, 2013). When there is an influx in thesupply of money from either sector, inflation is imminent andconsequently ruining the economy. The government can control the flowof money through the economy by regulating it’s spending ondevelopment and increasing taxes. Alternatively, if the flow of moneywithin the economy is low, the government will increase its spendingand lower taxes.

Among the tools of fiscal policy are fully managed compensatorybudget, cyclically balanced budget, and annual balanced budget. Thecyclically balanced budget employs the proceeds from a prosperousperiod to settling the public debt (Cordes et al, 2013). This way,the government does not have to tax its citizen more in order toservice public debts. When public expenditure surpasses revenue, thegovernment resorts to public borrowing. The fully managedcompensatory budget involves carefully adjusting taxes, publicborrowing, expenditure, and revenue in order to increase employmentwithout necessarily causing inflation.

During the 2008 recession, the USA Congress passed the Economicstimulus Act of 2008. The policy sought to protect the Americanpublic from the jaws of economic recession. Part of the policyentailed $600 tax rebates for Americans falling under the low andmiddle-income brackets (Blanchard,2011). The policy also set a limit within which the usecould make budgetary allocations for the next three fiscal years. Theresults of the fiscal policy saw the USA survive the recession. Wereit not for the Act, many Americans falling under the lowestsocio-economic class would have suffered the brunt of economicrecession.


Blanchard, O. (2011).MacroeconomicsUpdated (5th ed.). EnglewoodCliffs: Prentice Hall.

Cordes, T., Kinda, M. T., Muthoora, M. P. S., &amp Weber, A. (2015).Expenditure Rules: Effective Tools for Sound ?(No. 15-29). International Monetary Fund.

Hansen, A. H. (2013). Fiscal policy &amp business cycles. NewYork: Routledge.