What is a fiscal policy and how does it influence the economy

Fiscal policy represents the set of decisions made by authorities regarding taxes and public spending. Although it may sound complex, at its core it is a tool through which governments shape the economic behavior of their citizens and the productivity of the country.

The central role of taxes in fiscal policy

Taxes are the main mechanism through which these policies operate. They not only determine the funds available for the government to finance public services, but they also directly impact citizens' spending decisions. When taxes increase, people tend to spend less; when they decrease, the opposite occurs. This cascading effect is what allows legislators to exert influence over aggregate demand.

How fiscal policy works in practice

Let's imagine a scenario where the government reduces taxes while increasing public spending. This combination aims to stimulate aggregate demand, reactivate consumption, and consequently generate more jobs. It is a strategy that also seeks to maintain budgetary balance by leveraging surpluses.

Conversely, when inflation surges, authorities may choose to raise taxes and cut spending to cool the economy and stabilize the value of money.

Positive Effects as Well as Limitations

When implemented correctly, a sound fiscal policy contributes to:

• Raise employment rates
• Control inflation sustainably
• Maintain the stability of the economic system
• Improve the socioeconomic indicators

However, its effectiveness greatly depends on the context. In economies with high levels of corruption or weak institutions, these policies can lead to counterproductive results.

The dilemma of the level of government intervention

Lawmakers constantly face a crossroads: determining how much participation the State should have in the economy. This debate, which divides opinions among economists and political scientists, lacks a single answer. While some advocate for minimal government interference, others argue that a certain degree of intervention is indispensable to maintain a balanced society and prevent extreme inequalities.

Synthesis

Fiscal policy is ultimately the mechanism by which a government redefines its tax system and the economic direction of the country. By modifying taxes, public spending, and inflation, authorities seek to influence aggregate demand and employment rates to achieve stability and sustained growth.