Financial policy, types and when governments use them

One factor determining the country's economic direction is fiscal policy. The government uses fiscal policy to influence the economy by adjusting revenue levels and spending levels. The state uses the sources of income and how to spend, such as the wages of employees, spending on infrastructure or various service projects in order to reach economic and social equilibrium levels. The government is targeting different fiscal policies to increase GDP and improve overall demand levels

Taxes affect the economy by determining how much money the government has to spend in certain areas and how much money people have to spend. For example, if the government is trying to stimulate spending among consumers, it can reduce taxes. Tax cuts provide families with additional funds, which the government hopes to spend on goods and services, thereby stimulating the economy as a whole.

Spending is used as a tool for fiscal policy to pay government funds to specific sectors that need economic stimulus. Anyone who gets those dollars will have extra money to spend. As with taxes, the government hopes that money will be spent on other goods and services. The following are the most important financial policy instruments:

1. Business Tax Policy: The taxes paid by companies to the government affect profits and the amount of investment. Tax cuts increase total demand and spend on business investment. There are other types of taxes, such as indirect taxes, corporate taxes, and state tariffs on local goods and services.
2. Government spending: Total demand increases through government spending. Government expenditure is controlled by its size and how it is distributed to various activities within the country. It has a strong impact on these activities, and the impact on some of these activities will affect other related activities.
3. Taxes on individuals such as income tax that affect their personal income and how much they can spend, and inject more money into the economy.

Types of fiscal policy

There are two main types of fiscal policy: expansion and contraction. Expanded fiscal policy, designed to stimulate the economy, is often used during recession, high unemployment or other low periods of business cycle. It requires the government to spend more money, reduce taxes, or both. The goal is to put more money in the hands of consumers so they spend more and stimulate the economy.

Deflationary fiscal policy is used to slow economic growth, as is the case when inflation is growing very fast. In contrast to expansionary fiscal policy, deflationary fiscal policy increases taxes and cuts spending.