Fiscal policy is the government's use of spending and taxes to steer the economy.
Where the money comes from
Direct taxes
On income and profits: income tax, corporate tax.
Indirect taxes
On spending: VAT, fuel and tobacco duties.
State-owned firms
Selling goods and services, such as train tickets or postage.
Selling assets
Selling land, buildings or a state-owned firm (privatisation).
The points to remember
- Write it like this: "Fiscal policy is the use of government spending and taxation to change AD and reach macroeconomic objectives."
- Fiscal policy is set by the government; monetary policy by the central bank.
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Not all government spending is the same.
Where the money goes
Current spending
Day-to-day costs: teachers' and nurses' wages, medicines.
Capital spending
Things that last: roads, schools, hospitals.
Transfer payments
Money given with nothing produced in return: pensions, benefits.
The points to remember
- Write it like this: "Transfer payments are money the government gives to low-income or vulnerable groups, to reduce poverty and inequality."
- Transfers are not counted in G: nothing is produced in return.
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Spending and taxes can serve six goals.
Six goals of fiscal policy
Low unemployment
Spend more or tax less in a recession.
Low and stable inflation
Spend less or tax more in a boom.
Smaller booms and busts
Lean against the business cycle.
Stable conditions for growth
Spend on roads, schools and research.
Fairer income
Progressive taxes and transfer payments.
External balance
Avoid a large current account deficit.
Remember it as: Recession: spend more, tax less. Boom: spend less, tax more.
This 10-mark question was set at Standard Level in November 2022 and May 2026; Higher Level Paper 1 can ask it in the same form.
Explain two goals of fiscal policy.
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How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |