Expansionary fiscal policy includes tax cuts, transfer payments, rebates and increased government spending on projects such as infrastructure improvements. For example, it can increase discretionary government spending, infusing the economy with more money through government contracts.
Expansionary fiscal policy is used to kick-start the economy during a recession. It boosts aggregate demand, which in turn increases output and employment in the economy. In pursuing expansionary policy, the government increases spending, reduces taxes, or does a combination of the two. If government spending exceeds tax revenues, expansionary policy will lead to a budget deficit.
How it can impact GDP
Expansionary fiscal policy can impact the Gross Domestic Product (GDP) through the fiscal multiplier. The fiscal multiplier (which is not to be confused with the monetary multiplier) is the ratio of a change in national income to the change in government spending that causes it. When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect.
Zimbabwe's expansionary fiscal policy
Zimbabwe had an expansionary fiscal policy for 2020 which forced monetary authorities to be accommodative to finance rising government expenditure amid indications expenditure would exceed the budgeted ZWL$64bn, a leading brokerage firm has said. “Even before the start of the fiscal year (Jan 1, 2020), the authorities had announced the re-introduction of grain subsidies, which were abolished in the November budget, as well as subsidies for seven other food items. Transport subsidies have been increased, while upward pressure on salaries remains imminent,” Invictus Securities said in a December 2019 monthly market update and economic outlook report.
At its meeting on November 29, 2019 the Monetary Policy Committee noted that the country’s expansionary fiscal policy was expected to pile inflationary pressure on the economy. The Committee noted that the country’s 2020 National Budget had potential expansionary impact on money supply, which limits the scope for tightening of monetary policy as required under the Reserve Bank of Zimbabwe's disinflation programme.