BusinessWhat is a fiscal policy and why is it important?

What is a fiscal policy and why is it important?

Fiscal policies are used by governments across the world to control and influence the economy. They’re largely used to keep a nation’s economy in a healthy state and can be amended depending on the aims. It’s a good idea to be aware of any fiscal policies that have been implemented as they can affect vast numbers of the population.

Those with savings, credit or investments are often likely to be affected by such policies. Professional traders using trading platforms will also need to be aware of fiscal policies as they can determine price movements within the market.

There are different types of fiscal policies in the UK which are often implemented alongside monetary policies.

Fiscal policies explained

Fiscal policies in the UK include discretionary and automatic. Discretionary policies refer to one-off changes whereas automatic policies include those used to boost or slow down the economy.

Fiscal drag creates a situation where taxpayers enter higher tax brackets and therefore help to increase government revenue. Conversely, fiscal boost is used when an economy slows or enters recession. When more people pay less tax, they have more income, which helpsgive the economy a boost. Government welfare benefits also play a role in helping to increase the economy during uncertain times.

Advantages of fiscal policies

There are multiple benefits of implementing fiscal policies. These include:

  • A higher standard of living for a larger portion of the population
  • Specific sectors or groups of the population can be targeted
  • Overall economic improvement
  • Increased opportunities for businesses
  • Incentives for those new to business
  • Can be used to lower budget deficit

However, depending on the type of policy implemented, there can also be some downsides.

Disadvantages of fiscal policies

Some downsides to fiscal policies include:

  • Higher tax rates can have a detrimental impact on certain groups
  • Can be used for political power
  • Is difficult to use for lowering inflation due to the possibility of lower investment
  • Can increase equality across certain groups

Using fiscal policies or monetary policies

Monetary policies differ from fiscal policies in that these are determined by the Bank of England, rather than the government. Monetary policies include interest rates and inflation. There is no political agenda associated with any changes, however, the Bank of England work to the government’s target of a2% inflation rate.

Rather than changing government spending, monetary policies exist to alter the supply and demand of money. The effect is a change in the rate of borrowing, making it easier or more difficult to borrow credit. This has recently been seen with the higher mortgage rates, resulting in households having to switch to more expensive deals.

These policies are usually used to reduce economic pressure. However, in times of great recession, fiscal policy is often used alongside monetary policies.

Both policies have a role to play in stabilising the economy of any given country, particularly during times of economic crises, and they will no doubt continue to be used to stimulate and limit growth.

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