Advisers - Fiscal Policy

Fiscal policy is the use of government expenditure and taxation to manage the economy. The main changes in fiscal policy happen once a year in the Budget. It is in the Budget that the Chancellor sets the levels of taxation and government expenditure for the next fiscal year. The fiscal year runs from 5th April one year until 4th April the following year. This is why the budget is usually in March. The changes in it come generally into effect in the following month. In the Virtual Economy life is a lot easier - you can make changes any time you like! Just use the link to the model in the top navigation bar or on the 4th floor in the side bar to get there from anywhere in the Virtual Economy.

Fiscal policy can be used in various different ways. It may be used to try to boost the level of economic activity when the economy is flagging a little. In this case it is called reflationary policy. Alternatively the economy may be doing a little too well and in need of slowing down. In this case deflationary policy is called for. The final use for fiscal policy is as a tool of supply-side policy.

The rest of the pages in this section go into more detail on each of these policies. To access them, use the links below, on the right-hand side or at the foot of the page:

• Reflationary fiscal policy
• Deflationary fiscal policy
• Fiscal policy as a supply-side tool

To help imagine how these policies work think of the economy as a balloon. The air in the balloon is the level of demand or economic activity. If the balloon is a little low and short of air you want to reflate it, but if it is over-expanded and in danger of bursting then you deflate it. The same is true of the economy, though when it is over-expanded instead of bursting we get other problems such as higher inflation and a larger balance of payments deficit. Supply-side policies are then policies that manage the capacity of the balloon; making it bigger so it can take more air or making the balloon material more stretchy so it can expand further and so on.