Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. The role and objectives of fiscal policy have gained prominence in the current crisis as governments have stepped in to support financial systems, jump-start growth, and mitigate the impact of the crisis on vulnerable groups. In the communiqué following their London summit in April, leaders of the Group of Twenty industrial and emerging market countries stated that they are undertaking “unprecedented and concerted fiscal expansion.” What do they mean by fiscal expansion? And, more generally, how can fiscal tools provide a boost to the world economy?
Historically, the prominence of fiscal policy as a policy tool has waxed and waned. Before 1930, an approach of limited government, or laissez-faire, prevailed. With the stock market crash and the Great Depression, policymakers pushed for governments to play a more proactive role. More recently, countries scaled back the size and function of government, with markets taking on an enhanced role in the allocation of goods and services. Now, with the financial crisis in full swing, a more active fiscal policy is back in favor.
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