Fiscal Policy

Fiscal Policy, a very vital part of economics, is referred to as the government spending as well as revenue collection of a country.
Fiscal Policy has two main instruments that are;

•    Government spending
•    Taxation.

There are certain changes in the composition and level of government spending and taxation that impact the following variables in the economy of a country:

•    Aggregate demand and the level of economic activity.
•    Resource allocation pattern.
•    Distribution of income.

The overall effect of the budget outcome on an economic activity is termed as Fiscal policy of a country. There are three particular stances regarding the fiscal policy of a country that are; neutral, expansionary and contractionary:

•    A neutral stance regards a balanced budget where “Government spending = Tax revenue” (G = T). The government spending is funded by tax revenue and the overall effect of the budget outcome is neutral on the economic activity.
•    Expansionary stance of the fiscal policy denotes a net increase in Government spending (G > T) through rises in government spending or a fall in taxation revenue or a combination of the two. The effect usually leads to a larger budget deficit or a smaller budget surplus than the Government previously had, or a deficit if the Government previously had a balanced budget. Expansionary fiscal policy is mostly associated with budget deficit for an economy.
•    Contractionary fiscal policy (G < T) involves the reduction of the Government spending through higher taxation revenue or reduced Government spending or the combination of the two in such a way. This leads to a lower budget deficit or a larger surplus than the Government  previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.

Funding Methods

The government spends money on a wide variety of things, from the military and police to services like healthcare and education, as well as transfer payments that stand as welfare benefits. This expenditure can be funded in a number of ways:

•    Taxation
•    Benefit from printing money
•    Borrowing money from the population that results in a fiscal deficit.
•    Consumption of reserves.
•    Sale of assets i-e land etc.

There are two ways for the budgeting to go, one is that the Government will face deficit, and the other, it will face a surplus, these are the basic form of effects the Government spending have of course.