Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. Fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy.
Harvey and Joanson, M., defined fiscal policy as “changes in government expenditure and taxation designed to influence the pattern and level of activity.” G.K. Shaw defined fiscal policy as “We define fiscal policy to include any design to change the price level, composition or timing of government expenditure or to vary the burden, structure or frequency of the tax payment.”
Otto Eckstein defined fiscal policy as “changes in taxes and expenditure which aim at short run goals of full employment price level and stability.”
An effective fiscal policy is composed of policy decisions relating to entire financial structure of the government including tax revenue, public expenditures, loans, transfers, debt management, budgetary deficit, etc. The two main instruments of fiscal policy are changes in the level, composition of taxation, and government spending in various sectors. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply.
Fiscal policy can be distinguished from monetary policy, in that fiscal policy deals with taxation and government spending and is often administered by an executive under laws of a legislature, whereas monetary policy deals with the money supply, lending rates and interest rates and is often administered by a central bank.