Fiscal Policy

Government decisions about spending and taxation that affect aggregate demand, economic growth, and public debt levels.

Fiscal policy is the use of government spending and taxes to influence the economy, as distinct from monetary policy controlled by the central bank. "Expansionary" fiscal policy — increased spending or tax cuts — injects demand and tends to boost near-term growth. "Contractionary" policy — spending cuts or tax increases — reduces demand and is used to rein in deficits or cool an overheating economy.

In the United States, fiscal policy is set by Congress and the President. The annual federal budget, tax legislation, and emergency stimulus packages are all examples. The COVID-19 relief packages totaling over $5 trillion were arguably the most aggressive peacetime fiscal expansion in US history and are widely cited as a major contributor to the inflation surge of 2021–2023.

Fiscal and monetary policy interact constantly. Large deficits require Treasury to issue bonds; if the central bank does not absorb those through QE, increased supply can push up interest rates, partially offsetting the stimulus. This "crowding out" dynamic means the two levers can work together or against each other depending on the policy mix.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.