What are fiscal policies?

  • November 11, 2021

Governments have long used many policies in the economy. The economy anywhere in the world is affected by shocks that cause significant changes in the supply and demand system. Policymakers can control and minimize the effect of shocks on macroeconomic variables by using a variety of policies, including fiscal. In oil-exporting countries such as Iran, where government revenues are heavily influenced by oil revenues, there is a strong correlation between government fiscal rules and the state of oil revenues. Hence, fluctuations in these revenues are also affected by the fiscal policies of macroeconomic variables and distract them from a stable situation. Thus, the need for fiscal policy in these countries is very important.

Fiscal Policy

Fiscal policies are policies that governments use as a tool to control and influence the economy. It can be said that due to the high interdependence of economics and politics, it is necessary to use tools to balance the two. Many economic variables change automatically as conditions change or other variables change. In such cases, the economy may deviate from its course. Fiscal policies are actions that are used with the intent to change macroeconomic variables and steer the economy in the right direction. Fiscal policy is the intersection of economics and politics; Therefore, governments implement policies on the market of goods and services to achieve economic goals. These policies are about changing income and expenses to affect the market supply and demand of products. The most important tools for governments to implement fiscal policy are changes in spending and taxes.

Governments’ goals for implementing fiscal policies can vary. In developed countries, for example, governments use this policy to control inflation, increase employment, and end the recession. In developing countries, too, governments use fiscal policy tools to increase their revenue, economic growth, and supply. Changing macroeconomic variables such as increasing gross domestic product (GDP), which reflects the living conditions of society, is also one of the important goals of the government.

In general, the government has expenses such as the implementation of development plans and projects, the provision of welfare and educational services, health services, subsidies, and so on. Government revenues also include taxes, the issuance of bonds, the sale of natural resources and assets, the printing of money, and so on. To implement fiscal policies, the government changes each of these based on its assessments and estimates.

Types of government fiscal policies

The fiscal policies that governments use in the economy include both expansionary and contractionary policies, which we will examine below.

Expansionary fiscal policies



Policies that drive economic activity are known as expansionary policies. The government uses these kinds of policies to increase working money in society and increase demand for products and services. Reducing taxes and increasing government spending are among the government’s tools for implementing expansionary fiscal policies.

Expansionary fiscal policies are implemented to open up production and reduce unemployment. As the government increases its spending, it increases people’s demand for goods and services, and the production cycle increases, and employment increases. These policies are used when employment is low and markets and the economy are in a recession.


Contraceptive fiscal policies



Policies that restrict economic activity are contractionary policies. The government uses contractionary fiscal policies to reduce working capital in society to reduce demand for goods and services. Increasing taxes and reducing government spending are among the tools for implementing contractionary fiscal policies. As taxes increase, government spending decreases, and demand in society decreases. These types of policies are used to reduce demand and inflation when society is in a state of high employment and inflation is caused by the overuse of production resources.



The difference between fiscal policy and monetary policy

As we have explained, fiscal policies are changes in government current and development expenditures to control revenue or expenditure, changes in taxes, and other financial payments; But monetary policy includes policies that change or control the amount of money and change the structure of interest rates in society. Monetary policy instruments include changes in the monetary base and money supply, changes in bank lending rates, and changes in legal reserves. Monetary policies are tools that the central bank uses to change the money supply. The goals of monetary policy include job creation and economic growth, stabilizing the general level of prices, and stabilizing bank interest rates and stability in the financial and foreign exchange markets.

Monetary policy, like fiscal policy, has two types of expansionary and contractionary policies. Expansionary monetary policy uses tools such as lowering interest rates, increasing lending and facilities to increase liquidity and production. In contrast, with rising bank interest rates and rising borrowing and lending costs, contractionary monetary policies are implemented to reduce liquidity, increase bank savings, reduce demand, and control inflation.

The most important tool of the central bank to implement monetary policy is the interest rate. Macroeconomic variables and, in general, economic activities are greatly affected by interest rates.

In general, monetary and fiscal policies together have a great impact on the country’s economy, employment, and supply and demand; Therefore, decision-makers, the government, and the central bank must consider the current macroeconomic variables and determine and implement the best plan for their goals.


According to what we have said, in different economic conditions, different policies are adopted. Since Iran’s economy is highly dependent on oil revenues, government spending is reimbursed in this way; Therefore, by changing the country’s oil revenues, the government uses different fiscal policies; Therefore, the choice and implementation of fiscal policies depends on the economic conditions of the country and government revenue.

Many economists, by examining the situation, select the appropriate policies and the government implements these policies through its tools. Proper implementation of fiscal policies can pull an economy out of recession and lead it to prosperity, or it can keep the production cycle in optimal condition. It should be noted that fiscal policies must be accompanied by monetary policies to deliver the right results.

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