What is fiscal policy, and why does it matter?

Fis­cal pol­i­cy is a tool used by gov­ern­ments to reg­u­late eco­nom­ic activ­i­ties in their coun­try. It involves the use of gov­ern­ment spend­ing, tax­a­tion and bor­row­ing to influ­ence eco­nom­ic growth, sta­bi­lize infla­tion and main­tain a sta­ble econ­o­my. This arti­cle will explain what fis­cal pol­i­cy is, how it works, and why it is important.

What is fiscal policy?

Fis­cal pol­i­cy is a tool used by gov­ern­ments to reg­u­late eco­nom­ic activ­i­ties in their coun­try. It is one of the two main cat­e­gories of eco­nom­ic pol­i­cy, along with mon­e­tary pol­i­cy. The main goal of fis­cal pol­i­cy is to con­trol the econ­o­my through gov­ern­ment spend­ing and taxation.

How does fiscal policy work?

The gov­ern­ment has a num­ber of ways to affect the econ­o­my through fis­cal pol­i­cy. One of the pri­ma­ry meth­ods used is gov­ern­ment spend­ing. The gov­ern­ment may boost eco­nom­ic activ­i­ty and cre­ate jobs by rais­ing spend­ing, which will add more mon­ey to the economy.

Anoth­er way that fis­cal pol­i­cy works is through tax­a­tion. The gov­ern­ment can boost dis­pos­able income, which in turn can boost con­sumer spend­ing, by decreas­ing tax­es. This could encour­age eco­nom­ic expan­sion and boost activity.

Impor­tant old chart of mine. 

Fis­cal pol­i­cy cre­at­ed infla­tion to a much larg­er extent than QE pic.twitter.com/zeT5jLqwVA

— AndreasSteno­Larsen (@AndreasSteno) March 18, 2023

Final­ly, fis­cal pol­i­cy is also used for con­trol­ling infla­tion. If the gov­ern­ment con­sid­ers infla­tion to be a con­cern, it may raise tax­es or cut spend­ing, both of which could help to low­er demand and lim­it inflation.

Why is fiscal policy important?

Fis­cal pol­i­cy is impor­tant because it can have a sig­nif­i­cant impact on the econ­o­my. By adjust­ing gov­ern­ment spend­ing and tax­a­tion, the gov­ern­ment can influ­ence eco­nom­ic growth, infla­tion and employ­ment levels.

Stimulating economic growth

The pro­mo­tion of eco­nom­ic growth is one of fis­cal policy’s main goals. The gov­ern­ment can pro­mote eco­nom­ic activ­i­ty and employ­ment by rais­ing spend­ing. As a result, there may be an increase in tax col­lec­tions and cor­po­rate and indi­vid­ual chances for growth in the economy.

Regulating inflation

Infla­tion con­trol is anoth­er key respon­si­bil­i­ty of fis­cal pol­i­cy. When there is an excess of mon­ey chas­ing an insuf­fi­cient amount of goods, infla­tion can result in price increas­es. The gov­ern­ment can low­er demand by alter­ing expen­di­ture and tax­a­tion, which can aid in reduc­ing inflation.

Relat­ed: Bit­coin and infla­tion: Every­thing you need to know

Reducing employment

Fur­ther­more, fis­cal pol­i­cy can be used to reduce unem­ploy­ment. The gov­ern­ment can pro­mote eco­nom­ic activ­i­ty and employ­ment by rais­ing spend­ing. As a result, there may be less unem­ploy­ment and more options for employment.

Managing debt

Fis­cal pol­i­cy can also be used to man­age gov­ern­ment debt. By adjust­ing gov­ern­ment spend­ing and tax­a­tion, the gov­ern­ment can influ­ence the amount of mon­ey it bor­rows. This can help man­age the government’s debt lev­els and ensure that it is able to meet its finan­cial obligations.

➡️ New: Leg­is­la­ture’s per­son­al income tax & cor­po­rate tax pro­pos­als would raise between $1.6 – $2.1 billion:

• Sen­ate & Assem­bly income tax increase: $710M

• Assem­bly cor­po­rate tax increase: $1.2B for MTA & oth­er transit

• Sen­ate cor­po­rate tax MTA sur­charge: $930M for MTA pic.twitter.com/zj4gYE319K

— Fis­cal Pol­i­cy Insti­tute (@NYFiscalPolicy) March 16, 2023

Do cryptocurrencies have a fiscal policy?

Due to their decen­tral­iza­tion and lack of cen­tral­ized man­age­ment, cryp­tocur­ren­cies do not have a fis­cal pol­i­cy in the con­ven­tion­al sense. Yet the sup­ply and demand of some cryp­tocur­ren­cies may be impact­ed by the fact that they may have their own dis­tinct mon­e­tary poli­cies and rules writ­ten into their code.

Relat­ed: Ethereum as a defla­tion­ary asset, explained

For exam­ple, Bit­coin (BTC) has a fixed max­i­mum sup­ply of 21 mil­lion coins, which is hard­cod­ed into its blockchain pro­to­col. This means that no more than 21 mil­lion BTC can ever be cre­at­ed, and this lim­it helps to reg­u­late its sup­ply and demand.

Even though cryp­tocur­ren­cies lack a tra­di­tion­al fis­cal pol­i­cy, the rules and pro­to­cols incor­po­rat­ed into their cod­ing can nonethe­less sig­nif­i­cant­ly affect their adop­tion and val­ue. For instance, alter­ations to the sup­ply or con­sen­sus algo­rithm of a cryp­tocur­ren­cy may have an impact on its secu­ri­ty and scarci­ty, which may have an impact on its price and mar­ket demand.

Mag­a­zine: Best and worst coun­tries for cryp­to tax­es — Plus cryp­to tax tips