What is fiscal control?

woman holding a book

Fiscal control is an economic policy in which a government intentionally avoids deficit spending. To exercise fiscal control, a government does not spend more than it can collect in the same period on taxes or on the sale of assets. The aim is to avoid the need for borrowing and therefore future interest payments. Political opponents may regard it as an unfairly neutral term and prefer to describe some versions of the policy as fiscal conservatism.

To intentionally adopt a policy of fiscal control is effectively to take a position in a major political and economic debate about whether governments should borrow to finance public spending. It is possible for a government to spend more than it receives, borrowing money through measures such as issuing bonds. Proponents of this type of borrowing, known as deficit spending, argue that the cost of borrowing is outweighed by the benefits of being able to invest in capital expenditures, such as building new schools, and compare it to a business loan to finance expansion. Advocates of deficit control argue that such spending is irresponsible and puts public finances under even greater pressure in the future, especially given interest payments on loans.

Assessing these policies can be difficult in economic terms. This is because some elements of government spending and revenue vary with economic cycles without a change in economic policy. The main examples are taxes and pension expenses. This means that during a recession, a government that operates a policy of economic control may still run a budget deficit. To allow for a fairer comparison, some economists try to adjust expenditure and revenue measures to take account of business cycles.

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It can also be difficult to assess whether a policy qualifies as deficit control when a country already has a large debt or accumulated surplus. A government with a general principle of fiscal control may be able to spend more than it receives in a period, funding the excess of an existing surplus. For this reason, there may be a difference between a government’s long-term economic policies and principles and the spending pattern in a given year.

Some of the measures used to achieve the economic objective can be seen as having a political element. For example, it could be argued that having high taxes that equate to a high level of spending is exercising fiscal control, as the balance is still neutral. Some advocates of fiscal control, however, may always operate a policy of emphasizing reduction in spending to reduce government involvement in markets. Opponents of such a policy might call it politically motivated and label it fiscal conservatism.

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