You’ve probably heard mentions of fiscal policy. It’s often a hot topic in Westminster, but the term is a broad one that can mean a number of different things.
In general, it refers to the government’s policies on spending and taxes and their influence on the economy.
Often, fiscal policy is spoken of in contrast to monetary policy, which is controlled by central banks like the Bank of England. Fiscal policy, on the other hand, is generally controlled by legislators, such as the UK Parliment.
What is included in fiscal policy?
Fiscal policy encompasses a broad range of government activities regarding spending and revenue, generally involving taxation.
Fiscal policy can include defence spending and social spending. It can also refer to temporary programmes like the furlough scheme during the pandemic. On the opposite side of the equation, it includes how taxes are structured, as well as tax code incentives and disincentives.
Why does fiscal policy matter?
Fiscal policy likely affects your life in more ways than you’re aware of. Almost everyone in Britain pays taxes, for example. Additionally, government spending programmes will affect you directly if you’re a beneficiary. For example, the minimum wage and labour laws, like those mandating overtime pay, fall under the umbrella of fiscal policy, as do trade policies like tariffs and fair trade agreements.
Government officials sometimes discuss fiscal policy in the larger context of supporting the economy or accomplishing certain goals — generally low unemployment and strong economic growth.
What’s the difference between fiscal policy and monetary policy?
Fiscal policy is often discussed in contrast to monetary policy, which is the other set of levers the government uses to influence the economy.
Monetary policy is set by central banks like the Bank of England, and includes the raising and lowering of interest rates in response to inflation and economic growth. It also refers to central banks’ ability to buy or sell bonds, which has become known as quantitative easing or tightening, respectively.
Monetary policy has been in the spotlight over the last year as the Bank of England has aggressively raised interest rates to slow inflation.
What’s an example of fiscal policy?
One of the most basic examples of fiscal policy in action is a tax cut. Governments often use tax cuts to stimulate spending or boost the economy. In the aftermath of the financial crisis, for example, the government issued a temporary payroll tax cut designed to help stimulate the economy and encourage workers to spend more.
Fiscal policy can also influence the stock market. Good fiscal policy can often help jump-start a new bull market.
As investors know, a wide range of factors can influence the stock market, but it’s important not to overlook the impact of fiscal policy. It’s a good idea to pay attention to headlines coming out of Westminster, especially those regarding government spending, taxes, and other decisions that can affect the stock market.