Fiscal Policy

Fiscal policy refers to taxing and spending policies of governments, often with a specific focus on budgeting and the effect of taxing and spending on the broader economy. Fiscal policy is one of, if not the, largest way in which governments affect economies.
Frequently Asked Questions
  • Can state and local governments in the US run fiscal deficits?
    There is nothing inherent preventing state and local governments from running deficits in the same way that national governments do. However, almost all U.S. State constitutions have balanced budget amendments, which legally prevent those specific states from doing so.
  • How does contractionary fiscal policy lead to the opposite of the crowding-out effect?
    Contractionary fiscal policy can decrease the crowding-out effect by increasing the amount of credit available to other borrowers because less lending is going to the government to finance its debt.
  • Can U.S. states declare bankruptcy?
    No, States cannot declare bankruptcy as it is not permitted by U.S. bankruptcy law. In addition, the U.S. Supreme Court decided in 1977 that Article 1, Section 10 of the U.S. forbids them from doing so.
  • What is the role of deficit spending in fiscal policy?
    Deficits are a critical tool in fiscal policy, allowing extra spending over and above what the government collects in taxes. This allows governments to finance important initiatives such as infrastructure improvement, economic stimulus during economic downturns, and national defense in wartime.
Key Terms

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