Fiscal policy is a tool which is used by national governments to influence the direction of the economy, generally with the goal of promoting economic health and growth. Fiscal policies can be approached in a variety of ways, and they tend to vary as heads of state change, because different people have their own approaches to economic issues. Nations must strike a balance with their fiscal policies, so that they benefit the economy without being perceived as too interfering.
The underlying component of fiscal policy is the government's budget, which determines how much it will spend on various goods and services. The amount of the budget is usually tied to tax revenues and other sources of income for the government. In a nation with a neutral fiscal policy, the budget and the tax revenues are equal, while expansionary policies create a budget deficit, because the government is spending more than it takes in. Contractionary or tight policies, by contrast, create a surplus, as tax revenues exceed budget expenditures.
When governments allocate funds to spend on goods and services, they think about the how the market works, and how their activities will impact the economy. For example, the decision to build a road could create a jobs, and stimulate the economies in the communities reached by the road, making the road a justifiable expenditure from the government's perspective. Fiscal policy also includes the establishment of tax policy and tax rates, as governments want to encourage citizens to spend money, thereby increasing demand and promoting economic growth. However, the government must strike a balance, as it needs enough money to function and provide services to citizens.
Citizens are often interested in the fiscal policy of their nations, and the topic commonly comes up during political campaigns. Most citizens would prefer to see tax rates kept low, and government services kept high, which establishes a rather contradictory situation, because the government cannot provide services without revenue. Politicians who claim to be able to accomplish these contradictory goals tend to be very popular.
There is a distinction between fiscal policies and monetary policies. Monetary policy deals specifically with money and the supply of money, revolving around the minting of new money, the establishment of interest rates, and other measures which influence the total supply of a nation's currency. While fiscal and monetary policy are often closely tied, they are separate entities, and in many governments, they are established by different agencies and individuals.
