Fiscal Policy and the Government

While the U.S. Federal Reserve Board directly influences the supply of money and credit in the economy, the government, through its fiscal policy, also indirectly affects the nation's economic condition.

In establishing fiscal policy, the president proposes an annual budget to the Congress.  As Congress determines what programs are needed, it must also consider how these programs will be funded.  Raising taxes is the simplest and most common answer.

Consumers and businesses pay these taxes to the government.  The government, in turn, spends the money on programs designed to help the citizens and the country, such as interstate highways, the space program and the military.

By deciding whether to raise or lower taxes, and whether to increase or decrease spending, the government is controlling a major part of the money supply.  For example, during infalationary times, the government might exercise fiscal policy by taking money out of the pockets of consumers by increasing taxes.  During periods of deflation, the government might put more money in the hands of consumers by cutting spending and lowering taxes.

If the government spends less than it collects in taxes, a budget surplus results.  If the government spends more than it collects, the condition is called deficit spending.  A balanced budget results when the income from taxes equals the money spent on programs.