Fiscal policy is a term that is used to explain the role of government in the economy. Through taxation and spending policies, governments aim to influence macroeconomic variables such as unemployment rates, inflation and overall economic growth. For example, lowering taxes when an economy is slowing down or in danger of falling into recession, may encourage consumers and corporations to spend and invest more, thus boosting economic growth. Meanwhile, increasing government spending can also provide a stimulus to the economy.
In recent years, fiscal policy across much of the developed world has been focused on austerity – reducing the scale and influence of government in an attempt to slowly reduce the burden of public debt. Meanwhile, central bankers, with their monetary tools, have become the dominant force in macroeconomic decision-making. This has failed to save us from a prolonged period of stagnation, however, and it looks increasingly likely that fiscal policy will start to make a comeback.