Fiscal Policy as it Relates to Taxation
Fiscal policy is a government’s use of taxation, borrowing and government spending to influence economic activity (in both size and structure) and the aggregate demand in that country. It is a powerful tool and a major determinant of economic performance of a country, but only in the short run.
Fiscal policy is funded through several methods, such as seignior-age, taxation, borrowing from the population or foreign sources (through the use of bonds, treasury bills, securities or simply – loans), sale of fixed assets (land, natural resources, companies…) or through the consumption of fiscal reserves.
Depending on its effect on the aggregate economic activity, fiscal policy can be restrictive or expansive.
Restrictive fiscal policy is characterized either by cutting government spending or by raising taxes. Its aim is usually to reduce fiscal deficit (also called budget deficit).
Expansive fiscal policy is characterized by an increase in government spending or tax cuts. It is used to boost economic activity and it is often financed through debt.