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- Governments in modern economies play a very important role in the economic process. They collect taxes, provide a variety of services and often undertake production and distribution of goods using inputs purchased from the rest of the economy. They borrow on the capital market and from financial institutions and are engaged in capital formation.
- The levels in composition of taxes, the volume and composition of government expenditures and the level of public debt all have significant microeconomic and macroeconomic effects. Fiscal policy, narrowly interpreted, refers to actions governing and volumes of government expenditure (and hence the resulting deficits or surpluses) and government borrowing. In a broader sense it refers also to the structure of taxation, composition of expenditure, methods of financing deficits and composition of public debt. Fiscal policy is normally the responsibility of the finance ministry or the treasury.