Essential definitions

Fiscal policy

The use of government spending and taxation to influence economic activity and objectives.

Current expenditure

Government spending on recurring goods, services and operations.

Capital expenditure

Government spending that creates or improves long-lived productive assets.

The government budget as a policy tool

Fiscal policy is the use of government expenditure and taxation to influence the economy. Purchases can create demand directly; taxes and transfers change what households and firms can spend. The budget also shapes public services, fairness and future productive capacity. This section moves from those basics to demand effects, HL calculations and an assessment of practical limits.

Revenue includes direct taxes on income or wealth, indirect taxes on expenditure and non-tax receipts such as fees or public-enterprise income. Borrowing finances a gap; it is not tax revenue. Selling an asset provides one-off cash rather than a continuing revenue stream. Collection depends on economic activity, compliance and administration.

What different spending does

Current expenditure runs services, including public employees' pay and operating purchases. Capital expenditure buys long-lived assets such as roads or hospitals. Transfers, including benefits and pensions, redistribute income without buying current output in return.

Government purchases enter G in aggregate demand. Transfers affect consumption when recipients spend them, so do not count both the transfer and the purchase as new output. A new school can raise demand during construction and improve skills later. These are separate effects with different timing and uncertain size.

Read the balance and the objectives

The budget balance is revenue minus total outlays over the same period. A negative result is a deficit; a positive result is a surplus. All figures below are annual billions of currency units. Revenue of 130 and outlays of 140 give a deficit of 10. This describes financing needs, not whether every item is useful or policy became more expansionary than last year.

Fiscal decisions can support employment, stable prices, growth, equity and external balance. Stronger demand often increases imports; investment may improve export capacity later. Cutting services to reduce demand can harm future health or productivity. Compare the changed budget with a baseline and the economy's condition before recommending either more spending or restraint.

Apply and evaluate

• The composition of spending can matter as much as its total for distribution and productive capacity.

Real-world application

Sources and applications

• IB Economics guide: first assessment 2024, updated October 2022 · 2022-10