Fiscal Policy
Fiscal policy is the use of government spending and taxation to influence the economy, set in the US by Congress and the President.
Governments can stimulate the economy by increasing spending, cutting taxes or sending direct payments, which is expansionary fiscal policy. They can cool the economy or reduce deficits by cutting spending or raising taxes, which is contractionary fiscal policy.
Unlike monetary policy, which the independent Federal Reserve controls, fiscal policy is decided through the political process and laid out in budgets and legislation. Some effects are automatic: during recessions, tax receipts fall and unemployment benefits rise without new laws, which helps cushion the downturn. These are called automatic stabilizers.
When spending exceeds revenue, the government runs a budget deficit and borrows by issuing Treasury securities. Large deficits can increase the supply of Treasuries and may influence interest rates and inflation over time.
For investors, fiscal policy can shape whole industries. Example: an infrastructure bill can boost demand for construction and materials companies, while tax law changes can affect corporate after-tax earnings.