The means through which a governmental body monitors its spending and taxation to affect that nation’s economy gets referred to as Fiscal Policy. Authoritative bodies of a country utilize fiscal policy to encourage sustainability in the nation’s growth and poverty reduction.

Due to the current global crisis, the world witnessed inflation in the prominence of the objectives and the role played by fiscal policy. Various governments backed up vulnerable groups with financial support and helped jump-start their growth while also mitigating the effect of the pandemic on these vulnerable groups.

Mechanism of Fiscal policy, in simpler terms by Paul Haarman

Policymakers, like governmental bodies, often seek to impact the financial system, and to do so, they refer to two primary resources: Fiscal policy and its sister strategy, monetary policy. Authorities of a nation impact the financial system by adjusting levels and the kinds of taxes, the composition and limits of spending, and the form and degree of borrowing. In a roundabout way, Federal Reserve banks aim to impact the supply of money by tailoring interest rates, foreign exchange, bank reserve needs, and the selling and purchasing of governmental securities. 

Paul Haarman simplifies that the government indirectly and through direct means impact the utilization of resources in the financial system. A national income equation better explains the GDP of a country, following expenditures.

GDP or gross domestic product is the worth of all end services and products produced. In contrast, the other side of the equation refers to the total supply and spending of the financial system. C stands for personal consumption, G purchases services, and goods, and I stands for investment. NX stands in for Net Exports. The national income equation shows how the government can impact the economy through its financial activities, including taxes, purchases, investments, and transfers.

You can consider Fiscal policy as expansionary if it increases the total demand straight via enhanced government spending. And a fiscal policy doing the contrary, by lowered spending, reduces the market, known as tight.

The objectives of a fiscal policy can vary, apart from offering services and goods, including highways, free primary education, etc. For short spans, governmental bodies might invest in microeconomic sustenance, for instance, expansion of purchases or cutting on taxation to restore an ailing financial system. It can even slash investments and increase taxes to fight inflation or aid in reducing vulnerabilities externally, as asserted by Paul Haarman.

For more extended periods, the objective may shift to cater to sustainable growth and reduce poverty via activities done in the supply section of the financial system.

Fiscal policy during a global crisis

Fiscal policy has also played a significant role in the current global crisis faced in the form of COVID-19. The pandemic has not only resulted in a health crisis but has also given a drop in economic activities. It has affected the financial system throughout the world, the economic sector. It has also impacted private consumption, international trade, and investment, which affects the GDP of a nation.

Various measures can help businesses remain afloat and preserve employment. Recovery can be weak as things come back to normal, but prompt fiscal action can help save and strengthen it.