1. Introduction and Definition

Fiscal policy is the policy under which the government uses the instruments of taxation, public spending and public borrowing to achieve various objectives of economic policy. It is concerned with effects of these on income, production and employment.

While fiscal policy deals with the taxation and expenditure decisions of the government, monetary policy deals with the supply of money in the economy and the rate of interest. In most modern economies, the government deals with fiscal policy while the central bank is responsible for monetary policy.