Fiscal policies refer to how governments spend and employ taxation to influence economic conditions, such as demand for employment, goods and services, economic growth, and inflation. The government’s decisions are aimed at regulating business cycles and balancing the economy in a way that allows them to create favorable conditions that align with their overall policies and goals.
When a government uses fiscal policy to increase economic growth, it’s known as an expansionary fiscal policy. In such cases, the government runs on a deficit, meaning their spending is greater than their revenue. This is done by giving consumers and business owners tax cuts, hence encouraging them to make investments and spend more.
On the other hand, a contractionary fiscal policy involves the government decreasing spending and increasing taxes to slow economic growth and control inflation.
What does any of this have to do with me?
Fiscal policies that are made at federal levels have an impact on the decisions and day to day lives of everyone in the economy—from ordinary people to large corporations and, of course, the state itself. All economic endeavors depend on such policies, making them incredibly relevant to all stakeholders.
Fiscal policy has an effect on share markets because it impacts rates of interest, taxes on income and investment, and given the nature of fiscal policies, the decision to invest may be inhibited or encouraged. Be aware of the current government’s policies before buying shares since your personal interests may not align with the federal policy.
As investors, it’s helpful to know what your government’s current policies are in order to make decisions that could end up either making you a lot of money, or costing you heavily.
Learn more about how financial decisions are made by reading our other blogs and articles.