Explanation :In the short-term, fiscal policy affects mainly the aggregate demand. In the long-term, it affects consumers’ saving and investment activities and the overall long-term growth of the economy. Government spending on goods and services includes the remuneration of those employed in the public sector, the payment of pensions to those retired of the public sector, public investments in infrastructure as well as investments in government agencies, farming, research and so on. Government revenue is mainly incurred by direct taxes and indirect taxes. Direct taxes include the income tax; the real estate transfer tax; the property tax; the inheritance tax; tax donations, and parental benefits. Indirect taxes include the value added tax; sales taxes, and import duties. Other sources of government revenue are the profits of public companies and the fines imposed on offenders regarding fees applicable to the use of public services.
In a nutshell :
- Fiscal policy refers to the use of government spending and tax policies to influence economic conditions.
- Fiscal policy is largely based on ideas from John Maynard Keynes, who argued governments could stabilize the business cycle and regulate economic output.
- During a recession, the government may employ expansionary fiscal policy by lowering tax rates to increase aggregate demand and fuel economic growth.
- In the face of mounting inflation and other expansionary symptoms, a government may pursue a contractionary fiscal policy.