Government spending and taxation decisions — alongside monetary policy, the primary lever for managing economic cycles and distributing purchasing power.
Deeper Explanation
Fiscal policy affects aggregate demand directly: government spending adds to it, taxation removes it. Expansionary fiscal policy (stimulus spending, tax cuts) boosts growth; contractionary policy (spending cuts, tax hikes) slows it. Ray Dalio notes that fiscal and monetary policy interact: when monetary policy is "pushing on a string" (rates at zero, no borrowing demand), only fiscal policy can inject purchasing power directly into the hands of those who will spend it. The size and composition of fiscal policy matters: infrastructure spending has long economic multipliers; transfer payments to high-income households less so. Monitoring fiscal policy direction is essential context for cycle positioning.
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