What is fiscal policy and why does it affect your wallet?

Let's understand in a simple way how governments use fiscal tools to shape the economy. Fiscal policy is the set of decisions made by authorities regarding taxes and public spending. When a country decides to increase or decrease these elements, it is directly influencing how money flows throughout society.

The central engine: taxes

Taxes are the heart of any fiscal strategy. They represent the main source of resources that governments have to finance public services, infrastructure, and social programs. But their impact goes beyond that: when taxes rise, citizens have less money available to spend, which can slow down economic activity. Conversely, reducing the tax burden can encourage spending and private investment.

How it works in practice

Governments constantly face a dilemma: finding the balance between raising enough funds and not discouraging economic activity. An expansive fiscal policy, for example, involves increasing public spending while reducing taxes. This combination aims to stimulate aggregate demand and, in theory, create more jobs and opportunities.

Working alongside other policies

Fiscal policy does not operate in isolation. It is complemented by monetary policy ( controlled by central banks through interest rates ) to guide the economy towards stability. Both tools work together to control inflation, maintain the value of money, and generate healthy employment rates.

Real-life impacts

When governments properly implement these policies, the positive effects can be significant: increased employment, price control, a more dynamic economy. However, poor implementation (especially in contexts of corruption) can result in unemployment, uncontrolled inflation, and economic inequality.

The eternal discussion

There is an ongoing debate among economists about how much governments should actually intervene in the economy. Some argue that certain fiscal regulation is necessary to maintain social and economic health. Others prefer freer markets with less state interference. The truth is that fiscal policy will continue to be a fundamental tool for nations to adjust their economic direction and face new challenges.