Fiscal policy is all about how the government uses spending and taxes to influence the economy. The way it works changes depending on whether the economy is growing or shrinking.
When the economy is doing well, the government wants to keep prices steady and avoid making the economy too hot. Some tools they use include:
Spending Less: By cutting down on what they spend, the government can help slow down the economy a little. For example, in 2020, the government in the UK spent about 39% of its money on various things, but during times when the economy grows, they often spend less.
Raising Taxes: Higher taxes can make people spend less money. In 2021, the UK government decided to raise corporate taxes to 25% starting in April 2023 to help cool down the economy during its growth phase.
When the economy is struggling, the goal is to help it grow and reduce unemployment. The tools they use are quite different:
Spending More: During tough times, the government often puts more money into things like building roads, schools, and hospitals. For example, when the UK faced a financial crisis in 2008, they created a £37 billion plan to boost the economy.
Lowering Taxes: Cutting taxes can leave people and businesses with more money to spend, which helps get things moving again. In 2020, the UK government cut taxes to help the economy recover from the pandemic, raising the personal tax allowance just a bit.
The goals during these times vary:
When the Economy is Growing: The main goal is to keep prices stable and manage inflation, which was about 3.4% in the UK in 2022.
When the Economy is Shrinking: The focus is on lowering unemployment, which was at 4.5% in the UK in 2021, and getting people spending again.
Fiscal policy can have important effects on the economy:
By understanding these different approaches, policymakers can better respond to changes in the economy, helping it stay balanced and grow.
Fiscal policy is all about how the government uses spending and taxes to influence the economy. The way it works changes depending on whether the economy is growing or shrinking.
When the economy is doing well, the government wants to keep prices steady and avoid making the economy too hot. Some tools they use include:
Spending Less: By cutting down on what they spend, the government can help slow down the economy a little. For example, in 2020, the government in the UK spent about 39% of its money on various things, but during times when the economy grows, they often spend less.
Raising Taxes: Higher taxes can make people spend less money. In 2021, the UK government decided to raise corporate taxes to 25% starting in April 2023 to help cool down the economy during its growth phase.
When the economy is struggling, the goal is to help it grow and reduce unemployment. The tools they use are quite different:
Spending More: During tough times, the government often puts more money into things like building roads, schools, and hospitals. For example, when the UK faced a financial crisis in 2008, they created a £37 billion plan to boost the economy.
Lowering Taxes: Cutting taxes can leave people and businesses with more money to spend, which helps get things moving again. In 2020, the UK government cut taxes to help the economy recover from the pandemic, raising the personal tax allowance just a bit.
The goals during these times vary:
When the Economy is Growing: The main goal is to keep prices stable and manage inflation, which was about 3.4% in the UK in 2022.
When the Economy is Shrinking: The focus is on lowering unemployment, which was at 4.5% in the UK in 2021, and getting people spending again.
Fiscal policy can have important effects on the economy:
By understanding these different approaches, policymakers can better respond to changes in the economy, helping it stay balanced and grow.