Fiscal policy refers to the federal government's spending, budget, and tax policies set by the President and Congress. Learn how fiscal policy works and the ways it impacts the U.S. economy to better understand what it means for your personal finances.
Fiscal policy refers to decisions the U.S. government makes about spending and collecting taxes and how these policy changes influence the economy. When the government makes financial decisions, it has to consider the effect those decisions will have on businesses, consumers, foreign markets, and other interested entities.
Expansionary fiscal policy is when the government expands the money supply in the economy using budgetary tools to either increase spending or cut taxes—both of which provide consumers and businesses with more money to spend.
The President and their administration and Congress are responsible for fiscal policy.
The primary tools of fiscal policy are collecting taxes and government spending. The government can raise or lower taxes when needed to ensure its fiscal policy goals are achieved. The same goes for government spending.
Contractionary fiscal policy is when the government either cuts spending or raises taxes. It gets its name from the way it contracts the economy. It reduces the amount of money available for businesses and consumers to spend to slow economic growth.
Discretionary fiscal policy is a change in government spending or taxes. Its purpose is to expand or shrink the economy as needed.
The national debt is the public and intragovernmental debt owed by the federal government. It’s also called sovereign debt, country debt, or government debt.
A budget deficit is when spending exceeds income. The term applies to governments, although individuals, companies, and other organizations can run deficits.
A progressive tax imposes a higher rate on the rich than on the poor. It's based on the taxpayer's income or wealth.
A fiscal year is a 12-month period that an organization uses to report its finances. It starts at the beginning of a quarter, such as Jan. 1, April 1, July 1, or Oct. 1. The organization can be a government, business, or nonprofit.
The public debt is how much a country owes to lenders outside of itself. These can include individuals, businesses, and even other governments. The term "public debt" is often used interchangeably with the term sovereign debt.
The debt ceiling is a limit that Congress imposes on how much debt the federal government can carry at any given time. When the ceiling is reached, the U.S. Treasury Department cannot issue any more Treasury bills, bonds, or notes. It can only pay bills as it receives tax revenues. If the revenue isn't enough, the Treasury Secretary must choose between paying federal employee salaries, Social Security benefits, or the interest on the national debt.
A government shutdown is when non-essential discretionary federal programs close. It occurs when Congress fails to appropriate funds or the president doesn’t sign the appropriations bills.
Tax cuts are reductions to the amount of taxpayers' money that goes toward government revenue. Since they save voters' money, tax cuts are usually popular, while tax increases are not.
The Congressional Budget Office is a nonpartisan federal agency that analyzes the economy for the U.S. Congress. It also assists the House and Senate Budget Committees. It reviews the president's annual budget. It also reports on the deficit impact of every important piece of legislation.