Contractionary Fiscal Policy & Expansionary Fiscal Policy in Economics UPSC

Contractionary Fiscal Policy & Expansionary Fiscal Policy in Economics UPSC

Contractionary Fiscal Policy Contractionary Fiscal Policy refers to a government strategy aimed at reducing aggregate demand in the economy to control inflation, reduce fiscal deficits, or stabilize the economy during periods of excessive growth. It is typically implemented by decreasing government spending, increasing taxes, or both. Key Features of Contractionary Fiscal Policy : Reduced Government Spending : Cutting public expenditures on infrastructure, subsidies, or welfare programs. This reduces the money circulating in the economy. Increased Taxes : Raising tax rates (income tax, corporate tax, indirect taxes). Higher taxes decrease disposable income, reducing consumption and investment. Balanced or Surplus Budget Focus : The government aims for lower deficits or even a budget surplus. Objectives : Control Inflation : By reducing overall demand in the economy, it helps curb rising prices. Reduce Fiscal Deficit : Ensures government borrowing remains sustainable. Prevent Overheating : Slows down an ove…