The Importance Of Fiscal Policy

When you consider how the U.S. government regulates money markets, you will see the importance of fiscal policy. This term describes how the government monitors the activities of the U.S. Treasury. The government makes decisions that affect the flow of money, which affects consumers and businesses.

U.S. Treasury

One aspect of fiscal policy deals with how much the federal government can go into debt. The national debt can be defined generally in different ways. One way is how much interest payments will cost the U.S. Treasury in any period, such as monthly or yearly. The Treasury must make payments to people who have purchased Treasury bonds. When interest payments are high, the government is more indebted.

Percent of GDP

Another way to look at fiscal policy in terms of the U.S. Treasury's interest payments is this number as a percentage of the country's gross domestic product, or GDP. If this percentage is higher than historical averages, the nation is more in debt compared to its economic output, or domestic product.

Percent of Capital Spending

Another way to think of fiscal policy is to determine how much debt interest payments will be as a percentage of the government's annual spending. In the U.S., interest the Treasury must pay can be considered a percent of the total budget that Congress authorizes each year. When it is a higher percentage of the budget, the government is carrying a higher debt than it might have in other years. This is not a sign of economic strength.

Address Uncertainties

Fiscal policy also helps a government handle the effects of fluctuating income. From year to year, the amount of revenue the government collects in taxes varies. This will affect the government's ability to pay interest on its debts and to spend according to the legislative budget. Fiscal policy gives the government options, such as making spending cuts or raising the debt ceiling, or how much the government can borrow, in years when tax revenues fall short.

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