Glossary · Economy
Fiscal policy
Fiscal policy is how a government uses spending, taxes and borrowing to influence the economy.
Also called: budget policy
Revenue: $5.4T.
Fiscal 2025. Revenue: 17.0% of GDP.
In plain words
Governments collect taxes and spend money on schools, roads, defense, pensions and health care. When they change how much they spend or tax in order to steer the economy, that is fiscal policy. Its partner is monetary policy, run by the central bank with interest rates.
In a slump, a government can spend more or cut taxes to put money in people’s pockets (a stimulus). In a boom, it can spend less or tax more to cool things down (sometimes called austerity). Either way, the difference shows up in the budget deficit.
The US federal government spent $7.4T in fiscal 2026 and collected $5.4T. Spending was 22.7% of GDP in fiscal 2025, against an average of 20% since 1950.
Example
A stimulus check, step by step
- The government sends $1,000 to each of 100 million households: $100 billion, borrowed.
- Households spend, say, 60% of it: $60 billion of extra sales at shops.
- Shop owners and workers spend 60% of their extra income in turn: $36 billion more, then $21.6 billion, and so on.
- Total extra spending: $60 + $36 + $21.6 + … ≈ $150 billion from $100 billion, a multiplier of 1.5.
Real multipliers are uncertain and usually smaller: some money is saved, some buys imports, and the central bank may raise rates in response. Estimates range from well below 1 to about 2.
One level deeper
Some fiscal policy happens without anyone voting: the automatic stabilizers. In a recession, income-tax revenue drops and unemployment benefits rise by themselves, cushioning the fall; in a boom the reverse slows things down.
Big fiscal moves come in emergencies. Federal spending reached 41% of GDP in 1944, during the Second World War, and 31% in 2020, the highest since 1950.
There are limits. Borrowing must be repaid or rolled over, and when the economy is already running at full speed, extra spending mostly pushes up prices. Timing is hard too: by the time a law passes, the slump may be over.
US federal spending and revenue since 1929, % of GDP
The gap between the lines is the deficit, or the surplus when revenue is on top. Spending jumped in the Second World War and in 2020; revenue has stayed in a narrower band since the 1950s.
The numbers behind the chart
| Date | Spending (outlays) | Revenue (receipts) |
|---|---|---|
| 1929 | 3.0% | 3.7% |
| 1930 | 3.6% | 4.4% |
| 1940 | 9.2% | 6.4% |
| 1950 | 14.2% | 13.2% |
| 1960 | 17.0% | 17.1% |
| 1970 | 18.2% | 18.0% |
| 1980 | 20.7% | 18.1% |
| 1990 | 21.0% | 17.3% |
| 2000 | 17.4% | 19.8% |
| 2010 | 23.0% | 14.4% |
| 2020 | 30.6% | 16.0% |
| 2021 | 28.7% | 17.0% |
| 2022 | 24.1% | 18.8% |
| 2023 | 22.1% | 15.9% |
| 2024 | 23.0% | 16.7% |
| 2025 | 22.7% | 17.0% |
Why it matters
It is the main tool governments have to fight recessions, especially when interest rates are already near zero.
Spending and tax choices decide what gets paid for (schools, pensions, defense) and who pays for it.
Lasting deficits build up the national debt, which shapes future budgets and interest rates.
A common mistake
Myth: Fiscal policy is set by the central bank.
In fact: Fiscal policy belongs to the government and the legislature: taxes and spending. Central banks run monetary policy: interest rates and money. They often act together in a crisis, as in 2008 and 2020.
Questions people ask
What is the difference between fiscal and monetary policy?
Fiscal policy is government spending and taxes, decided by lawmakers. Monetary policy is interest rates and the money supply, set by the central bank.
What is expansionary fiscal policy?
More spending or lower taxes to boost demand, usually in a recession; it widens the deficit. Contractionary policy does the opposite.
How much does the US government spend?
$7.4T in fiscal 2026. The biggest items are Social Security, the health programs Medicare and Medicaid, defense, and interest on the debt.
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About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- Federal surplus or deficit (−), fiscal years: U.S. Office of Management and Budget, Historical Tables (Table 1.1), via FRED, series FYFSD; retrieved from FRED, Federal Reserve Bank of St. Louis.
- Federal surplus or deficit (−) as a percent of GDP, fiscal years: U.S. Office of Management and Budget; Federal Reserve Bank of St. Louis, Historical Tables (Table 1.2), via FRED, series FYFSGDA188S; retrieved from FRED, Federal Reserve Bank of St. Louis.
- Federal net outlays, fiscal years: U.S. Office of Management and Budget, Historical Tables (Table 1.1), via FRED, series FYONET; retrieved from FRED, Federal Reserve Bank of St. Louis.
- Federal net outlays as a percent of GDP, fiscal years: U.S. Office of Management and Budget; Federal Reserve Bank of St. Louis, Historical Tables (Table 1.2), via FRED, series FYONGDA188S; retrieved from FRED, Federal Reserve Bank of St. Louis.
- This page explains a term. It is not investment advice.