Goals and Tools of Fiscal Policy

Definition (AO1)

Fiscal policy is the use of taxation and government expenditure to influence the level of economic activity in order to achieve macroeconomic objectives. 

Sources of Revenue and Expenditures (AO2)

Where does the money governments can spend on fiscal policy come from?

• Revenues:

• Direct and indirect taxation: Income taxes, inheritance taxes (both direct), sales taxes, carbon taxes (both indirect). 

• Sale of goods and services from state-owned enterprises: Most governments own some companies, who provide revenue.

• Sale of government assets: By selling state-run businesses like the postal service, the state telecom, etc., the government can make money. This can only occur once, though, as you can't sell a company twice.

• Expenditures:

• Current expenditures: Spending on goods and services within the current year, such as spending on healthcare and education.

• Capital expenditures: Long-term investments by the government, such as a new airport. 

• Transfer payments: Payments sent to people without any return. When the government gives unemployment benefits, no good or service is given in return.

Goals of Fiscal Policy (AO2)

• Low and stable inflation

• Low unemployment

• Promote a stable economic environment for long-term growth

• Reduce business cycle fluctuations

• Ensure an equitable distribution of income

• Ensure an external balance (exports = imports)