Fiscal policy is how governments use taxes and spending to steer the economy. When growth slows, governments can cut taxes or spend more to boost demand. When inflation runs hot, they can raise taxes or cut spending to cool things down. The tools are powerful and blunt.

Two main levers exist. Taxation pulls money out of the economy or leaves it in people's pockets. Government spending injects money through roads, schools, defense, and social programs. The combination determines whether the government runs a deficit or a surplus.

Fiscal policy is hard to get right. Timing is a problem. By the time a stimulus package passes, the recession may be over. Politics gets in the way. Tax cuts and spending programs are popular. Tax hikes and cuts to services are not. Automatic stabilizers, like unemployment insurance, help because they kick in without new legislation.

Key tools

• Tax rates and brackets
• Government spending programs
• Deficit and surplus targets
• Automatic stabilizers
• Stimulus and austerity measures