Pros and Cons of Fiscal Policy


What is fiscal policy? It is a term used to talk about the taxing and spending policies of a specific government at the local, regional, or national level. It’s a lot like having a personal budget which you follow, except instead of saving for the future, the government is supporting the public needs and social services the community requires. Here are some key points in the pros and cons of fiscal policy setting to consider.

The Pros of Fiscal Policy

1. It is reactionary to the ever-changing economic conditions a community faces.
When fiscal policies are in place, then interest rates can be cut to encourage growth when needed. More money can move between social programs as population needs change. Each community can use their taxes to support themselves in the best way possible.

2. It can be used to limit negative community behaviors.
The tax on cigarettes in the US is a good example of this. The high taxes discourage smoking, yet doesn’t eliminate the right someone has to smoke if they wish to do so.

3. Positive effects happen quickly.
People on food stamps get money to stop their hunger. Mental health care services can improve. Pot holes in roads get fixed. Communities can quickly see the positive benefits of a good fiscal policy.

The Cons of Fiscal Policy

1. It is easy to create a budget deficit.
Governments routinely spend more money than they get in taxes. This is called a deficit. Budgets are often created on projections and if incoming revenues don’t meet those projections, eventually services need to be cut.

2. Not all spending happens domestically.
Local dollars might be worth more when spent locally, but that doesn’t mean all spending happens at home. Imports are often the target of tax spending and this tends to limit the fiscal benefits that can be achieved.

3. Changes can be politically or personally motivated.
No one likes raising taxes. That’s why specific groups of people are generally targeted for more money when fiscal policies need it. This limits the political damage politicians may face.

The pros and cons of fiscal policy show that it is designed to help an entire community do more than survive – they will thrive. This only happens when the negative components are properly managed. That’s why knowing these pros and cons is so important.