Fiscal policy is the government’s use of taxing and spending to keep the nation’s economy stable. Decisions about fiscal policy are used to create the federal budget, a written document showing how much money the government expects to receive and spend in a year.
The budget process begins when each federal agency estimates spending for the next year. They send these estimates to the executive branch’s Office of Management and Budget (OMB). The OMB reviews proposals and, with the President’s staff, combines all budgets into one document, which the President presents to Congress. Congress reviews the budget with help from the Congressional Budget Office. Congress then proposes its modified budget and authorizes specific spending in appropriations bills, which the President can sign or veto.
Expansionary policies are designed to increase economic output. When the government increases its spending it buys more goods and services, leading to economic growth. When government cuts taxes, people have more money to spend, a situation which also leads to economic growth. Policies intended to decrease output are contractionary policies. These policies allow government to decrease its spending or raise taxes, both of which will lead to slower economic growth.
Fiscal policy is not easy to put into practice. Changes in the economy come slowly. During the time it takes to pass a budget and implement fiscal policy, the business cycle may change on its own.
