Glossary

Fiscal policy

The use of government taxing and spending to influence the economy, set by Congress and the president.

Also called: government spending and taxation policy

Fiscal policy refers to decisions about government spending and taxation made to influence economic conditions. In the United States these decisions are made by Congress and the president, unlike monetary policy, which is run by the Federal Reserve.

When the economy is weak, expansionary fiscal policy increases spending or cuts taxes to boost demand, a strategy associated with keynesian economics, as in the 2009 stimulus and 2020 pandemic relief. When it is overheating, contractionary policy would cut spending or raise taxes, which is politically hard. "Automatic stabilizers," such as unemployment insurance and progressive taxes, adjust without new laws. The Congressional Budget Office estimates the effect of legislation on deficits.

Economists disagree about how effective fiscal stimulus is, how large the multiplier on spending is and whether deficit-financed policy raises interest rates or crowds out private activity. Supply-siders emphasize tax rates and incentives over demand management. Fiscal choices determine the budget-deficit and the debt. Conservatives typically favor restraint on spending and lower taxes, while progressives emphasize public investment and social programs.

Last reviewed November 8, 2026

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Related terms

Monetary policy The actions of a central bank, such as setting interest rates, to influence money, credit and economic activity. Keynesian economics A school of macroeconomics, from John Maynard Keynes, holding that government spending can offset slumps in private demand. Budget deficit The amount by which federal spending exceeds revenue in a given year, financed by borrowing. Discretionary spending Federal spending that Congress sets each year through appropriations bills, including defense, transportation and many domestic agencies. Supply-side economics An approach holding that lower tax rates and less regulation boost production, investment and growth.