What is fiscal policy?
Fiscal policy refers to a government’s approach to public spending and taxation, and how these influence economic conditions such as inflation, employment, and demand for goods and services.
Generally, fiscal policy is used to promote and stimulate economic growth while reducing poverty, or it’s used reactively to mitigate the effects of global economic shocks or downturns.
Key takeaways from this section:
- A fiscal policy is how a government influences economic conditions through public spending and taxation policies.
- Fiscal policy is largely based on Keynesian economics, based on ideas from the economist John Maynard Keynes.
- Governments can employ expansionary or contractionary fiscal policies to counteract the effects of economic downturns or restrain runaway economic growth and inflation.
Understanding Fiscal Policy
Fiscal policy as a tool of governments has grown in use since the economic crises of the 20th century, such as the Great Depression. More recently, governments have tended to take more active roles in fiscal policy as a response to global recessions and political shifts.
Most modern fiscal policies are heavily based on the ideas of John Maynard Keynes, a British economist of the early 20th century who promoted the concept of governments taking an active role in their economies with a system that became known as Keynesian economics. Keynes made the case that governments should be able to regulate the economic output of a nation by adjusting spending and taxation, and thus weather recessions by making up for shortfalls in the private sector. This was in opposition to the previously held belief that markets and national economies could balance themselves and self-correct in the face of downturns.
There are many factors that can cause an economy to shrink or fall into recession, from changing political climates, to consumer fear or uncertainty, to natural disasters and more. A crash can also be preceded by runaway excess and unsustainable economic growth. Fiscal policy is designed to counteract these effects and manage the dips and rises through public spending and taxation.
Stabilising an economy through Fiscal Policy
If an economy is taking a nosedive due to a loss of demand in the private sector, a government could invest heavily in public projects and reduce taxation to stimulate growth and increase demand. If the private sector is growing too much and over-investing, the government can increase taxes and reduce public spending to temper demand.
This usually means governments need to run a budget deficit during economic downturns, known as an expansionary fiscal policy, and run a budget surplus during periods of growth, or a contractionary fiscal policy.
Expansionary and Contractionary Fiscal Policy
Expansionary Fiscal Policy
An expansionary fiscal policy aims to mitigate the effects of an economic downturn by stimulating demand and growth. Lowering taxes can mean consumers have more money to spend, thus creating more demand and fuelling growth through increased employment. Likewise, an increase in government spending, such as on public infrastructure projects, also fuels employment and a growth in demand. This also means running public finances at a deficit during tough economic times.
Expansionary Fiscal Policy
A contractionary fiscal policy seeks to restore some balance to the economy in the face of runaway growth and inflation and the threat of an economic crash. This can be done through an increase in taxes and a reduction in public spending, as well as reducing the public sector workforce or cutting wages. Interest rates can also be raised to restrict the supply of credit and slow inflation. This usually results in a government running a budget surplus, which can also raise public opinion issues in the face of wage cuts and increased taxes.
Fiscal policy FAQ's
Who creates a fiscal policy?
Fiscal policy is a tool of government, and usually the responsibility of the Treasury along with direction from the Prime Minister and the Cabinet. The budget also has to be scrutinised and approved by Parliament before its fiscal policy changes can be enacted.
Why do we need fiscal policy?
Fiscal policy is an important method for government to be able to influence and manage the economy, helping to stimulate growth and demand, and mitigate the impacts of financial crashes or other disasters that could otherwise cause greater harm.
Have you thought about Invoice Finance as a cash flow solution for your business?
Invoice finance allows you to release cash quickly from your unpaid invoices.
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Halo is one of the smartest bits of tech I have seen & every team is only as good a it's people and I would like to take this time to actually specifically point out Alex Hall & Claire Davies. Alex is an account manager that has continually improved during our time working together and is a real credit to Novuna. Claire has been exceptional from start to finish; meticulous in her work and very patient with us at every temp - an absolute star. It is a shame that the email address went to a generic platform and not each individual. I totally understand why this works better for companies but it did mean that the personal element was lost meaning that starts like Claire will be harder to identify from a customer point of view.
High recommedation for Novuna Business Cashflow.
My company was in need of invoice factoring to assist with the cashflow due to the nature of debtor days with our clients. After looking at a number of options, the right decision was made to work in partnership with Novuna Business Cashflow. Right from setup through sales to customer service, the communication and support has been outstanding. Providing me with all the information I needed regarding new clients coming onto our books. The system they use is so user friendly and the drawdown payments are very efficient in the fast moving world of temporary payroll. This has allowed my company to look at positive growth knowing we are safe financial hands. I would highly recommend Novuna Business Cashflow 10/10.
Set up went well and communication was good.
Syed and Vipul were extremely helpful top class service
Very helpful from the start
Great people made this process very straightforward.
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Teething problems -Maybe ?
It's still early days so I may alter this review at a later date. However with retentions and concentration limits and other items, were finding were not getting 85% up front, were probably getting nearer 70% Also when a customer pays the remaining allegedly 15% due to us seems not to be credited to become available. For instance a customer paid Â£6918 and a customer paid Â£1300 hence we should see an extra Â£1330 available (15% of both these payments). However availability seemed to go down and not up by Â£1330 !!! Hard to work out where this 15% has actually gone ? I'll re-submit this review when things become clearer.
I found Hitachi true to their world in every aspect of the service they promised. I can't recommend enough.
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Hitachi made the process of moving factoring facilities painless, bearing in mind we previously had our facility with the same provider since 1997. I cant fault Hitachi's staff and processes and we are delighted with the move.
Staff excellent all together professional
Great service so far
From start to finish the process for transferring our invoice finance to Hitachi has been been brilliant, a smooth transition, great communication our link Person Jonathan Oakes has helped the process go through seamlessly, A great experience so far and a brilliant start to what we hope will be a long term partnership.