The word 'fiscal' means 'budget' and refers to the government's budget. Fiscal policy,
therefore, is the use of government spending, taxation and transfer
payments to influence aggregate demand and, therefore, real GDP. If you
imagine the government as the doctor carrying the medical kit, these
three things are in the toolkit: government spending, taxes and transfer
payments
.The two main tools of fiscal policy are taxes and spending. Taxes influence the economy by determining how much money the government has to spend in certain areas and how much money individuals have to spend. For example, if the government is trying to spur spending among consumers, it can decrease taxes.
Revenue tools
Revenue tools refer to the taxes collected by the government in various forms. The taxes can be direct or indirect. Direct taxes are taxes levied on the income or wealth individuals and firms. This includes income tax, wealth tax, estate tax, corporate tax, capital gains tax, social security tax, etc.
Indirect taxes are taxes levied on goods and services. This includes sales tax, value added tax, excise duty, etc.
Spending Tools
Spending tools refer to increasing or decreasing government spending/expenditure to influence the economy. Government spending can be in the form of transfer payments, current spending and capital spending.
Current spending includes expenditure on essential goods and services such as health, education, defense, etc.
Capital spending is the public investment in infrastructure such as roads, hospitals, schools, etc.
The above two also include subsidy or direct provision of merit goods and public goods, which would otherwise be under provided.
Transfer payments are the redistribution of income from taxpayers to those requiring support, for example, unemployment benefits. It also includes interest payments on government debt.
.The two main tools of fiscal policy are taxes and spending. Taxes influence the economy by determining how much money the government has to spend in certain areas and how much money individuals have to spend. For example, if the government is trying to spur spending among consumers, it can decrease taxes.
Revenue tools
Revenue tools refer to the taxes collected by the government in various forms. The taxes can be direct or indirect. Direct taxes are taxes levied on the income or wealth individuals and firms. This includes income tax, wealth tax, estate tax, corporate tax, capital gains tax, social security tax, etc.
Indirect taxes are taxes levied on goods and services. This includes sales tax, value added tax, excise duty, etc.
Spending Tools
Spending tools refer to increasing or decreasing government spending/expenditure to influence the economy. Government spending can be in the form of transfer payments, current spending and capital spending.
Current spending includes expenditure on essential goods and services such as health, education, defense, etc.
Capital spending is the public investment in infrastructure such as roads, hospitals, schools, etc.
The above two also include subsidy or direct provision of merit goods and public goods, which would otherwise be under provided.
Transfer payments are the redistribution of income from taxpayers to those requiring support, for example, unemployment benefits. It also includes interest payments on government debt.
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