Fiscal Policy

Fiscal policy refers to the means by which government influences the economy. It usually consists of two components: revenue collection (taxation) and expenditures. Governments have an active role in determining the level and composition of the two components, as well as the balance between them. These can, in turn, affect income distribution and redistribution, poverty alleviation, and the level of welfare offered to citizens. There are two major dimensions of debate surrounding fiscal policy: (1) the degree (if at all) of government intervention in the economy and (2) the objective of fiscal policies.

The U.S. government’s involvement in the economy started with the Great Depression and the works of John Maynard Keynes. As opposed to a laissez-faire approach, Keynesian economics suggests that governments can affect the ...