What is fiscal policy? How is monetary policy different?

To stabilize the country’s economy, the government will intervene with fiscal policy. This policy is considered as a tool to improve inflation or when GDP growth rate is not as planned. So what is fiscal policy? How is it different from monetary policy?

What is fiscal policy?

First of all, fiscal is understood as a period of 12 months, effective for annual estimates and finalization reports of state budgets and enterprises. Fiscal year can be understood as “tax settlement year” or “fiscal year”.

Fiscal policy is a government measure that intervenes in the tax and spending system to grow the economy, stabilize prices, improve inflation, and create jobs and stable incomes for workers.

Only the government has the power and function to issue and enforce fiscal policy to change tax policy and government spending. Local governments do not have the authority to enforce this policy.


What tools does fiscal policy use?

The two tools that fiscal policy uses are government spending and tax tools

Government spending

Government Spending: is investment expenditures serving the national economy and people’s lives, including expenditures for defense and security, health care, education, etc., and investments. for infrastructure…


Taxes are fees that individuals and legal entities must pay to the government to finance government expenditures.

Direct tax is a tax levied directly on people’s assets or income (personal income tax, etc.)

Indirect tax is an indirect tax on the value of goods or services in production and consumption (VAT, excise tax, etc.)

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The role of fiscal policy

The core role of fiscal policy is to contribute to healthy economic growth.

  • Economic regulation through spending and taxes. Helps economic growth under normal conditions and economic balance in case of inflation or economic downturn.
  • Overcome market failures and distribute economic resources equitably through expenditures and taxes.
  • Redistribute and redistribute gross national product, adjusting income, assets and risks to create economic and social stability.
  • Orientation for development and economic growth.

Disadvantages of fiscal policy

Some disadvantages of fiscal policy are:

  • Time lag: To change market aggregate demand, change spending and tax policies, it takes the Government from 6 months to 12 months to collect enough reliable data. The right word also takes more time to come up with fiscal policy and implement.
  • Two difficult problems that the Government often encounters when implementing fiscal policy is not knowing the size of the impact of this adjustment on the macro-economy. Even if it can be calculated, it is only based on historical data, so policies will not be as effective as expected.
  • May adversely affect the stability of the macro-economy. When the economy is in a recession, real output will be much lower than potential output, hence the high unemployment rate. If the spending policy increases, it will reduce the budget, the risk of inflation and increase the government’s debt.
  • Directly affect the benefits, income and life of people.

Comparing fiscal policy and monetary policy

Fiscal policy and monetary policy are similar in that they are both tools to stabilize and promote economic growth and development.


Fiscal policy uses government spending and taxes to influence the economy.

Monetary policy uses credit and foreign exchange activities to stabilize the currency, stabilize and promote economic growth.

Policy creator

Fiscal policy: the policy maker is the government.

Monetary policy: the maker of policy is the central bank.

Policy Iimplementation tool

Fiscal policy: implementation tools are taxes and government spending.

Monetary policy: implementation tools are interest rates, reserve requirements, countervailing exchange rate policy, open market operations, quantitative easing


What is fiscal policy? This is a policy that plays an important role and meaning in stabilizing and developing the macro-economy, and orienting the country’s economic development. Only the government has the power and enforces fiscal policy through government spending and revenue (taxes).

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