Economy
Fiscal Policy
Definition
Government decisions about taxation and spending used to influence the economy. Expansionary fiscal policy involves increased spending or tax cuts; contractionary involves the opposite.
Explanation
Fiscal policy is the responsibility of elected governments, unlike monetary policy which is managed by central banks. During recessions, governments typically increase spending and cut taxes to stimulate demand (Keynesian economics). The challenge is that fiscal stimulus often increases government debt. The balance between fiscal stimulus and debt sustainability is one of the central debates in economics.