Fiscal Policy
Fiscal policy refers to taxing and spending policies of governments, often with a specific focus on budgeting and the effect of taxing and spending on the broader economy. Fiscal policy is one of, if not the, largest way in which governments affect economies.
Fiscal Policy Essentials
-
There is nothing inherent preventing state and local governments from running deficits in the same way that national governments do. However, almost all U.S. State constitutions have balanced budget amendments, which legally prevent those specific states from doing so.
-
Contractionary fiscal policy can decrease the crowding-out effect by increasing the amount of credit available to other borrowers because less lending is going to the government to finance its debt.
-
No, States cannot declare bankruptcy as it is not permitted by U.S. bankruptcy law. In addition, the U.S. Supreme Court decided in 1977 that Article 1, Section 10 of the U.S. forbids them from doing so.
Learn More Can U.S. States Declare Bankruptcy? -
Deficits are a critical tool in fiscal policy, allowing extra spending over and above what the government collects in taxes. This allows governments to finance important initiatives such as infrastructure improvement, economic stimulus during economic downturns, and national defense in wartime.
Key Terms
- Fiscal Policy
Fiscal policy refers to how governments collect and spend money. Fiscal policy is critical to how the government affects the economy at large.
- Subsidy
A subsidy is money given to an individual or organization by the government. Government subsidies are often given to businesses to try to bolster sectors of the economy considered especially important.
- Financial System
A financial system is a network of organizations that enable financial transactions. Financial systems are made up of, among other institutions, banks, insurance companies, and stock brokerages. While there is a global financial system, there are also many national and regional financial systems that interact with and overlap with each other and the world financial system.
- Smoot-Hawley Tariff Act
The Smoot-Hawley Tariff Act, the colloquial name for the United States Tariff Act of 1930, raised U.S. tariffs on many goods by 20%. This tariff, passed after the onset of the Great Depression, provoked retaliatory tariffs from many other countries. This trade war likely resulted in economic damage, but the amount is disputed.
- Implementation Lag
Implementation lag refers to the length of time between when an economic event, like a recession, begins, and when government interventions to deal with it are put in place. As such, governments need to try and take this lag into account or their interventions may be tailored to situations that are now passed.
- Works Progress Administration (WPA)
The works progress administration was a fiscal stimulus program created in 1935 as part of the New Deal to combat the Great Depression. It sought to lower the unemployment rate by directly hiring people to do various kinds of work, such as building infrastructure projects.
![Basel IV: A package of banking reforms developed in response to the 2008-09 financial crisis that began implementation on Jan. 1, 2023.](https://www.investopedia.com/thmb/otV5FANVZ_nb7la-IdY4i2YXwkM=/4000x2700/filters:no_upscale():max_bytes(150000):strip_icc()/basel-iv-5218598-final-267a6cdeadb846bdaeb4a235a7aed9bf.png)
![A Works Progress Administration supervisor teaches a woman how to weave a rug.](https://www.investopedia.com/thmb/EdZQhdQ1EPY3mG1dYUKJh6w5TE4=/640x478/filters:no_upscale():max_bytes(150000):strip_icc()/wpa-5740da1c5f9b58723d7c2c13.jpg)
![Low Income Home Energy Assistance Program (LIHEAP)](https://www.investopedia.com/thmb/N78TqX_dB6sBuXFqQ_gg_R2hbRM=/4000x2700/filters:no_upscale():max_bytes(150000):strip_icc()/low-income-home-energy-assistance-program-liheap-5179918_final-29affaaef34e428da6d0a439c673497b.png)
![Rohit Chopra](https://www.investopedia.com/thmb/7SYHv7l49YoieEV7EaGviCJVlbM=/3000x2000/filters:no_upscale():max_bytes(150000):strip_icc()/who-is-rohit-chopra-5096158_final-e2de5ef2f6764291a1af2523f8f98cf2.png)
![Fiscal Policy](https://www.investopedia.com/thmb/YFlrG47A8pmiGryGgdULTRdTmZQ=/1500x1000/filters:no_upscale():max_bytes(150000):strip_icc()/DDM_INV_fiscal-policy_df-5199e67bb34b4dcf83b058fa61ca4ad9.jpg)
Explore Fiscal Policy
![sheep at white house](https://www.investopedia.com/thmb/xliDjat2HjJjjxlxc7XIjumhasM=/1484x989/filters:no_upscale():max_bytes(150000):strip_icc()/white_house_sheep-582a5a883df78c6f6a85a075.jpg)
![Special Drawing Rights (SDRs): An international type of monetary reserve currency created by the International Monetary Fund (IMF) in 1969 that operates as a supplement to the existing money reserves of member countries.](https://www.investopedia.com/thmb/-TFIbCHvsBPPp599P7lHSX1DOXY=/4000x2700/filters:no_upscale():max_bytes(150000):strip_icc()/sdr.asp-final-3b506abece934ccc89789e8b43d04bc5.png)
![Worker stands amid shipping containers and drinks a canned drink while in the background a crane unloads more shipping containers.](https://www.investopedia.com/thmb/NV-QwHMdafTRk647_Z6TSHyopY4=/7008x4672/filters:no_upscale():max_bytes(150000):strip_icc()/WhatIstheSmoot-HawleyTariffActHistoryEffectandReaction-3eb943adba01456abd0ecd7415ebef2b.jpg)
![Deflation: The decline in prices for goods and services.](https://www.investopedia.com/thmb/XqoeP2KSngVJ7c_fKuc1_00JpHU=/4000x2700/filters:no_upscale():max_bytes(150000):strip_icc()/deflation.asp-final-d2d7591c4f0e41d380fbd3c1f2a826f0.jpg)
![Indian Rupees](https://www.investopedia.com/thmb/OUS3w8KkSCJzuVB14SopWSkV4DA=/2048x1536/filters:no_upscale():max_bytes(150000):strip_icc()/32190943222_d2f38af525_k-a26a5d1ea4b84606a0291832861cd61d.jpg)
![Bureau of Engraving and Printing Deputy Director Charlene Williams (R) shows US Treasury Secretary Janet Yellen (C) and Treasurer Marilynn Malerba a printing plate with Yellens and Malerba's signatures at the Bureau of Engraving and Printing Western Currency Facility on December 8, 2022 in Fort Worth, Texas.](https://www.investopedia.com/thmb/R-ie9NrUm_NTkVAnAzkGwnEPHW0=/3500x2333/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1245462209-5dbf8239bea64c6baccd11599653000d.jpg)
![Crapo Bill](https://www.investopedia.com/thmb/RAWwhhq2G_XuuV81Ds24aP2ktaU=/4000x2700/filters:no_upscale():max_bytes(150000):strip_icc()/crapo-bill.asp-final-fc91032becb04cff93bbb8f07fde8005.png)
![Subsidy](https://www.investopedia.com/thmb/3LCnyjYDkBL1wkj6E35WwqOiXsw=/1500x1000/filters:no_upscale():max_bytes(150000):strip_icc()/Subsidy-resized-3e847b1457174be0aaeb0760e42ca2e8.jpg)
![Wall Street and New York Stock Exchange in Downtown Manhattan, New York City, USA](https://www.investopedia.com/thmb/BBWLrlSWCYlJLQlWad0itF62nO0=/2121x1414/filters:no_upscale():max_bytes(150000):strip_icc()/wall-street-and-new-york-stock-exchange-in-downtown-manhattan--new-york-city--usa-1167037043-1e16292b58294e24a88c07e380cc3b43.jpg)
![New York Stock Exchange building.](https://www.investopedia.com/thmb/TSHxoSSMW--oeUPD6UHnAdqx0fY=/1024x683/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-180781133-62fcd22b4d114d0bb073be41fda41a25.jpg)
![](https://www.investopedia.com/thmb/McJc8ja4Vu0PHbCzlfXDdkoh6GM=/680x440/filters:no_upscale():max_bytes(150000):strip_icc()/thinkstockphotos_493208894-5bfc2b9746e0fb0051bde2b8.jpg)
![President Barack Obama signing bill in Oval Office.](https://www.investopedia.com/thmb/k7Ax52Ow716NmhSUEGrhEsiMZn8=/3000x2000/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-453034628-f9be576e331d46fcaeef07523da17897.jpg)
![U.S. Treasury Department in Washington](https://www.investopedia.com/thmb/qJxEDjxt28Yyltxvd14a4pnem2E=/2119x1415/filters:no_upscale():max_bytes(150000):strip_icc()/us-treasury-department--washington-dc-1135666461-5cc29e643bac4d38ac9fd835587bf77e.jpg)
![Close up of the Capitol Building, Capitol Hill, Washington, D.C., United States of America, North America](https://www.investopedia.com/thmb/-1fv85AH7t4N5ibgAYXlSN4uc70=/5200x3454/filters:no_upscale():max_bytes(150000):strip_icc()/close-up-of-the-capitol-building--capitol-hill--washington--d-c---united-states-of-america--north-america-479698089-59b5f5ec396e5a0010e24e47.jpg)
![Financial System](https://www.investopedia.com/thmb/0wyt4pfFa_4kdYkZQUJGJEyofdU=/1500x1000/filters:no_upscale():max_bytes(150000):strip_icc()/financial-system_final-a9f735f765244e84829563e8a147abf2.jpg)
![Making trading online on the smart phone](https://www.investopedia.com/thmb/M51XyMaZJ2-UTMyvODbwIxaOaVs=/5500x3667/filters:no_upscale():max_bytes(150000):strip_icc()/making-trading-online-on-the-smart-phone--new-ways-to-make-economy-and-trading-957725692-7b83f089bac344b49b0a367135e7da82.jpg)
![Pile of Canadian bills with one hundred dollars on top](https://www.investopedia.com/thmb/2vK7kQB247KkL_yz0oH8IaXVWzk=/2121x1414/filters:no_upscale():max_bytes(150000):strip_icc()/pile-of-canadian-bills-with-one-hundred-dollars-on-top-185066026-a0d78abb8db445cb9eb09391e8a08f4f.jpg)
![Full Frame Shot of Paper Currencies on Table](https://www.investopedia.com/thmb/VgZIF8Lr8VoR-cICKPzUHHAdqzo=/1500x1003/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1054017850-94cc2cd2d3dc46f8870987d17ae4e279.jpg)
![Sign with Marshall Plan in German](https://www.investopedia.com/thmb/WdtYqH1QjQvSOZhUb-dyqI3HEk4=/640x480/filters:no_upscale():max_bytes(150000):strip_icc()/About-Marshall-Plan-56cca78e3df78cfb37a26829.jpg)
![Close-up of Chinese Yuan](https://www.investopedia.com/thmb/GPzFBFuWRro-WlksMy7VQQpTVz4=/2121x1414/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1091169712-48c80a2ed4c24afeb0d4232643b760d7.jpg)
![Low angle view of modern office buildings skyscrapers in Manhattan Midtown, New York](https://www.investopedia.com/thmb/Zwjgi-fv3tsqubfpVWUjda6T6S8=/2121x1414/filters:no_upscale():max_bytes(150000):strip_icc()/low-angle-view-of-modern-office-buildings-skyscrapers-in-manhattan-midtown--new-york-1066278582-893bafb325f1449b8845b9d13b807c9d.jpg)
![China-Economy-Trade](https://www.investopedia.com/thmb/hw3mEwME7OtolZmQQZ5-PnHFyjw=/1500x1000/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1129182991-7a9a1338edb940e6aa21091480659c79.jpg)
![Fixed-Rule Policy Defintion](https://www.investopedia.com/thmb/6eiW0Xwz2cwkq5AwS-r9vij1rpw=/4000x2700/filters:no_upscale():max_bytes(150000):strip_icc()/fixedrulepolicy.asp-final-c5a5f2ed8b7141c9b5e3c355790999b9.jpg)
![Businessman in Import and Export Business](https://www.investopedia.com/thmb/iZmjLBQrlRe82lfpO5RrDcke6p0=/1500x1000/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-493197201-66167ff151eb48f0935c433c42935ac1.jpg)
![A gavel next to gold coins](https://www.investopedia.com/thmb/JDVKoenWHk1avf1OxjsczI4_aDI=/2119x1415/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1067720324-61282be764f64f62ae0916c38ae684ee.jpg)
![Curved skyscraper against blue sky](https://www.investopedia.com/thmb/cofWY3KKCfxZkB-7-79px6BnpXQ=/6016x4016/filters:no_upscale():max_bytes(150000):strip_icc()/curved-skyscraper-against-blue-sky-969510128-2756cdd5ec294069ac9fb850a1481ae6.jpg)
![Full Frame Shot of US Paper Currency](https://www.investopedia.com/thmb/SJskDD9r560nfX5NrbG6fcfE8-c=/1500x1001/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-767986903-f8ef84e27b9845eb8d216f83f9db9fa0.jpg)
![Senator Warren speaking at a podium](https://www.investopedia.com/thmb/PKkQ1C_0W38GCRLN5_BcgTG5azc=/5184x3456/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1096613892-57bce17ef51845018064265e5771bfd9.jpg)
![](https://www.investopedia.com/thmb/WD7DPrQHUkyc5ShhXpfd_-SA5vc=/680x440/filters:no_upscale():max_bytes(150000):strip_icc()/wall_street_179681980-5bfc2b9746e0fb0083c07d29.jpg)
![The US Federal Reserve building in Washington DC](https://www.investopedia.com/thmb/12eEj_gq2rRZMEoTtVtquHV7lHM=/3000x2004/filters:no_upscale():max_bytes(150000):strip_icc()/TheUSFederalReserve-2174c1eca6a94396830cd6e20c855977.jpg)
![World Currency Rates](https://www.investopedia.com/thmb/AA6ZV1srTnO3fdsWos1zKSsJpBM=/2183x1374/filters:no_upscale():max_bytes(150000):strip_icc()/world-currency-rates-483658563-86e131161a8141f6b391d974c71b8c42.jpg)
![](https://www.investopedia.com/thmb/Pc3t97MlcL3XOwGavrLT1dkLvRI=/205x136/filters:no_upscale():max_bytes(150000):strip_icc()/investing15-5bfc2b8fc9e77c00519aa65b.jpg)
![](https://www.investopedia.com/thmb/GdDUYXMSvxzEMPSua9MTEL08AjI=/205x136/filters:no_upscale():max_bytes(150000):strip_icc()/investing20-5bfc2b8f46e0fb00517be081.jpg)
![](https://www.investopedia.com/thmb/N3K9ODstOeVG7lRC_p5EAK2k4sY=/205x136/filters:no_upscale():max_bytes(150000):strip_icc()/investing11-5bfc2b90c9e77c00519aa65f.jpg)
![](https://www.investopedia.com/thmb/ptKsh0XVQvyOTqizIfRgwR0tEsk=/680x440/filters:no_upscale():max_bytes(150000):strip_icc()/125183558-5bfc2b8c46e0fb00517be02c.jpg)
![U.S. capitol building](https://www.investopedia.com/thmb/s-uU9rJSc-KphyRfi_Vn4jNB8Vs=/2121x1414/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-936281826-c20e3db197a04c49b761c769b100991d.jpg)
![](https://www.investopedia.com/thmb/bkAwzURRhujHVe98jxgRNH5vtGQ=/680x440/filters:no_upscale():max_bytes(150000):strip_icc()/investing2-5bfc2b8fc9e77c005143f176.jpg)
![](https://www.investopedia.com/thmb/0_Sud1D07_LYP8_6aZ16LzvPiMY=/680x440/filters:no_upscale():max_bytes(150000):strip_icc()/shutterstock_112522391-5bfc2b9846e0fb0051bde2d3.jpg)
![U.S. President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act](https://www.investopedia.com/thmb/ZuKl1dlFYBnHyhwLiUdgtOw92Q8=/3000x1957/filters:no_upscale():max_bytes(150000):strip_icc()/PresidentObamaSignsDodd-Frank-c5c5669e15b849e5a0e90f183d69446b.jpg)
![Person at a Desk, Looking at a Computer Screen](https://www.investopedia.com/thmb/Lu-niTsilwCRI7__mMtmkw1_L6U=/2120x1414/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1306844428-7898510289944252a593f9ed446c2251.jpg)
![Calculator keyboard with Tax- and Tax+ keys](https://www.investopedia.com/thmb/iCjdStc70-SSolWMUPb6a7Ub3Lw=/4524x3982/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-494331203-56a0a53b5f9b58eba4b26559.jpg)
![Form 1099-NEC: Nonemployee Compensation: A tax form used by businesses to report payments made to independent contractors, freelancers, sole proprietors, and self-employed individuals.](https://www.investopedia.com/thmb/N0XQk9sxzd1cuc93BKWiJq9AUi8=/4000x2700/filters:no_upscale():max_bytes(150000):strip_icc()/form-1099-nec-nonemployee-compensation-definition-5181240-final-040005b7ae304574a63f6af389f9df5b.png)
![Man doing his taxes](https://www.investopedia.com/thmb/ul_5LxrGjJ2a-gHxskBg9PDUm0k=/5119x3413/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-56970357-5867cc515f9b586e02191b68.jpg)
![Elderly couple speaking with a doctor in a hospital looking at a tablet](https://www.investopedia.com/thmb/DoBDWIMqkmoqr39-nCjYd8l0bf4=/2121x1414/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1214704093-aaeca4978eac4f33b06c79972cd9a217.jpg)
![The Purple Book](https://www.investopedia.com/thmb/ilVsxgfTwAVeoFelpMiBk8bpVsY=/4000x2700/filters:no_upscale():max_bytes(150000):strip_icc()/purple-book-5115856-FINAL-a63619d724d24f35b240785e55893739.png)
![1040 Tax form surrounded by dollar bills](https://www.investopedia.com/thmb/X4khFuoNrPXsN40l-KxmLksbY88=/2712x1852/filters:no_upscale():max_bytes(150000):strip_icc()/tax_refund-7f8e7a5064a0411381a554001e842085.jpg)
![Tampons](https://www.investopedia.com/thmb/cvPCMoRDjZdhzHMYcoK56dg_9UE=/3806x2619/filters:no_upscale():max_bytes(150000):strip_icc()/pileoftampons-5658acde3df78c6ddf43ae3e.jpg)
![Free Trade Agreement](https://www.investopedia.com/thmb/q6vfF-tgG_6KKLnxDX-uUWxxKGA=/1500x1000/filters:no_upscale():max_bytes(150000):strip_icc()/FTA-0375c877e1f24dd693adeca4b653131c.jpg)
![](https://www.investopedia.com/thmb/IMtAQXRZ28BQ-Zn_FtzMx5sijlk=/680x440/filters:no_upscale():max_bytes(150000):strip_icc()/ap675784005308-5bfc2b3fc9e77c00519a97d4.jpg)
![Value Added Tax](https://www.investopedia.com/thmb/lV48BNjBu1viln1n74-PeIxz42o=/1500x1000/filters:no_upscale():max_bytes(150000):strip_icc()/Value-Added-Tax-bfc9359a52f74ae9a430d4c2d7ce91e2.jpg)
![Shredded US one dollar bill.](https://www.investopedia.com/thmb/LUqgcz8cllx8WWt9Ip0e8Mq4-hI=/2121x1414/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-184868004-768f8e571d3a4d368163f95efd5a0ff4.jpg)
![Good and Services Tax](https://www.investopedia.com/thmb/2gak-IWhEd2XkzpmhFCIWDT8ko4=/1500x1000/filters:no_upscale():max_bytes(150000):strip_icc()/GoodsandServicesTax-36b9fbf71b1048a8ad617e0318af9c6b.jpg)
![Regressive Tax: A tax that is applied uniformly regardless of income.](https://www.investopedia.com/thmb/BvSXln4rbhd8T7o17UF0J9gb4lE=/4000x2700/filters:no_upscale():max_bytes(150000):strip_icc()/regressivetax.asp-final-28ca4ccf48fa48689f0907c7db951496.png)
![Taxation](https://www.investopedia.com/thmb/plyQito1H4gkbD-4Iriu3qKYcOA=/1500x1000/filters:no_upscale():max_bytes(150000):strip_icc()/Taxation_updated2-dfd2ae499d314d05972225d3f743f8aa.png)
![Container Cargo Ship and Cargo Plane With Working Crane Bridge in Shipyard at Sunrise](https://www.investopedia.com/thmb/HSxSoeqoy9-tShraA3dyblLteqE=/1500x931/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-864465648-e40ec117c1744b8c83ce6c7a9be0e8fa.jpg)
![Calculator and tax forms](https://www.investopedia.com/thmb/VqnKQIV1Xu9can-fFbTqkhulBf4=/2138x1402/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-88305470-6152a026f81d4a9198db0eeb8cbca446.jpg)
![A person seated at a desk looking at investment charts and taking notes.](https://www.investopedia.com/thmb/TvpUyDyh89zAUzZM9Xdj1GYvszg=/8659x5773/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1667326849-1ed43dbbfeae4abfaf63d2fb831138fb.jpg)
![State corporate tax rates in the United States (2017-19)](https://www.investopedia.com/thmb/lKiLLe7dYSggMVScHOxzdIl30mk=/1513x983/filters:no_upscale():max_bytes(150000):strip_icc()/State_corporate_tax_rate-d913771f47104ed6a746341ed611ce54.jpg)
![Small wooden tiles reading TAX next to money and a pushpin, all on a calendar](https://www.investopedia.com/thmb/kjyl1Jj6gzOaRz3YHPZpZXwQRLY=/2152x1393/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1190995919-bce27cedc8fa4274b70ffcd0062e6098.jpg)
![](https://www.investopedia.com/thmb/9bB6JQAvwQmLU12x0oOrB6td0xg=/658x260/filters:no_upscale():max_bytes(150000):strip_icc()/oil-5bfc36e246e0fb0051c07b88.jpg)