5.2.6—Fiscal policy stance

An expansionary fiscal stance raises aggregate demand through higher spending, lower taxes or larger transfers. A contractionary stance restrains demand through lower spending or higher taxes; a neutral stance broadly leaves the demand impulse unchanged.

Judge the stance by its effect relative to the existing position, not just by whether the budget is in deficit. Automatic stabilisers can make the balance move without a new discretionary decision.

A tax cut during a recession is expansionary even if the government still reports a deficit. A spending cut that reduces an existing deficit is contractionary, although debt may remain high.

A deficit is not synonymous with expansionary policy: a deficit can widen automatically in a downturn while discretionary policy is tightening.