Understanding Fiscal Policy for GCSE Economics

What is Fiscal Policy?

Fiscal policy refers to the government's policies regarding public expenditure, taxation, and borrowing. It is a key tool used by governments to influence a nation's economy.

Government Spending and Taxation

Governments can alter their spending levels and tax rates to impact aggregate demand in the economy. Increased government spending boosts demand, while higher taxes reduce disposable income and consumption.

Budget Surplus and Deficit

• Budget Surplus: When government revenue exceeds spending, leading to potential economic growth.
• Budget Deficit: When government spending exceeds revenue, requiring borrowing to cover the shortfall.

Economic Impact of Fiscal Policy

Expansionary fiscal policy (increased spending, lower taxes) aims to stimulate economic growth and employment during recessions. Contractionary fiscal policy (reduced spending, higher taxes) is used to control inflation and reduce public debt.

Worked Example

Scenario: During an economic downturn, the government increases spending on infrastructure projects and cuts income tax rates.

Analysis:

• Increased government spending directly boosts aggregate demand.
• Lower income taxes increase disposable income, encouraging consumer spending.
• Overall, this expansionary fiscal policy stimulates economic growth and employment.

Fiscal policy decisions consider factors like economic cycles, debt levels, and political priorities. Governments aim to balance economic stability with sustainable public finances.

For more details, refer to the BBC Bitesize Fiscal Policy guide and official exam board specifications.