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Chapter 11

Fiscal policy

Fiscal policy is the manipulation of the government budget in order to
influence the level of aggregate demand and therefore the level of
activity in the economy.

Aggregate demand is the total demand for goods and services in the
economy.

Fiscal policy covers:

 government spending – e.g. on healthcare, benefits, construction, business
investment

 taxation – from individuals and businesses

 government borrowing – the issue and repayment of government debt

The role of the government is to balance the budget. Expenditure by the government
is financed either by taxation or borrowing.

A balanced budget is where total expenditure is matched by total taxation income.

A budget deficit is where government expenditure exceeds taxation income. This
must be financed by government borrowing.

A surplus budget is where government expenditure is less than taxation income. In
this situation the government would be able to pay back some of its borrowing.

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