Budgeting and Tax Policy


Until the Great Depression of the 1930s, the U.S. government took a laissez-faire or hands-off approach to economic policy, assuming that if left to itself, the economy would go through cycles of boom and bust, but would remain healthy overall. Keynesian economic policies, with their emphasis on government spending to increase consumer consumption, helped raise the country out of the Depression.

The goal of federal fiscal policy is to have a balanced budget, in which expenditures and revenues match up. More frequently, the budget has a deficit, a gap between expenditures and revenues. It is very difficult to reduce the budget, which consists of mandatory and discretionary spending, but no one really wants to raise revenue by raising taxes. One way monetary policies can change the economy is through the level of interest rates. The Federal Reserve Board sets these rates and thus guiding monetary policy in the United States.