What does fiscal policy refer to?

Fiscal policy refers to the actions undertaken by a government to influence its economy through adjustments in government spending and taxation. This approach is aimed at managing economic performance, including overall demand, employment levels, inflation, and economic growth. By increasing spending or cutting taxes, the government can stimulate economic activity, while decreasing spending or raising taxes is often used to cool down an overheated economy.

This concept is crucial because it directly impacts the lives of citizens and businesses, influencing everything from public services and infrastructure to individual disposable income. Unlike monetary policy, which involves controlling the money supply and interest rates, fiscal policy is focused on government budgets and policies that can be modified to address economic conditions. Thus, it serves as a vital tool for governments in managing economic stability and growth.