countercyclical fiscal policy

Countercyclical fiscal policy is a strategy where governments use spending and taxation to counteract economic fluctuations. The core idea, largely influenced by economist John Maynard Keynes, is to manage the economy's cycles of expansion and contraction.1

During economic slowdowns or recessions, the government should increase spending or cut taxes. This injects money into the economy, stimulating consumer spending and business investment, thereby boosting growth and employment.1

Conversely, when the economy is booming and inflation is a concern, the government should decrease spending or raise taxes. This reduces the amount of money circulating, helping to cool down an overheating economy and stabilize prices. This approach aims to smooth out the "booms and busts" of the economic cycle.1