Sign upWhat is fiscal policy and how does it work?
Intermediate
2025-06-26
In any modern economy, governments play a critical role in steering economic activity, especially during times of turbulence or uncertainty. One of their most powerful tools for doing so is with a little thing you've probably heard about: fiscal policy. And yes, its effects now ripple far beyond traditional markets into emerging sectors like cryptocurrency.
To keep it simple, fiscal policy refers to government strategies around spending and taxation, aimed at influencing macroeconomic conditions such as growth, employment, and inflation. But in today’s digital age, fiscal decisions are also shaping the behavior of crypto markets. From influencing investor sentiment to driving the adoption of decentralized assets, fiscal policy is becoming a major force in the crypto narrative.
Understanding fiscal policy is key to decoding not just national budgets and political debates, but also broader financial markets and even emerging technologies like cryptocurrencies. Today at Toobit Academy, let's dive into the fundamentals of fiscal policy, how it works, and how it affects crypto.
The basics of fiscal policy
At its core, fiscal policy refers to how a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy.
Unlike monetary policy, which is managed by a central bank and involves controlling the money supply and interest rates, fiscal policy is legislated and enacted by the government—typically through the treasury or finance ministry in collaboration with lawmakers.
Fiscal policy can be either expansionary or contractionary:
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Expansionary fiscal policy is used during periods of economic slowdown or recession. It involves increasing government expenditures (on infrastructure, social programs, etc.), cutting taxes, or both. The goal is to inject money into the economy to spur demand, encourage investment, and reduce unemployment.
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Contractionary fiscal policy, on the other hand, is used when the economy is growing too fast and inflation becomes a concern. This involves reducing public spending or increasing taxes to cool down excessive demand and maintain price stability.
How fiscal policy works in practice
The practical application of fiscal policy involves a delicate balance. When a government wants to stimulate the economy, it may, for instance, initiate a large-scale infrastructure project. What a move like this does is that it creates jobs, boosts demand for materials, and has ripple effects across industries. Alternatively, tax cuts give households and businesses more disposable income to spend or invest.
However, these actions are not a magic wand that the government can wave to fix issues; it comes with a little thing called trade-offs.
Increased spending often requires the government to run budget deficits, meaning it spends more than it collects in taxes. To cover the gap, it borrows money by issuing bonds. While this can be effective in the short term, long-term deficits may lead to rising debt levels and concerns about fiscal sustainability.
Timing is also crucial when it comes to fiscal policy. Due to its nature of passing through legislative processes, there’s often a lag between identifying a need and implementing the response. Therefore, poor timing can either blunt the intended effect or worsen the economic cycle.
Fiscal policy and the broader economy
Fiscal policy is important because of its huge effect across the entire economy. It influences several factors, such as employment levels, inflation, consumer spending, and overall economic growth. By adjusting government spending and taxation, fiscal policy can either stimulate a sluggish economy or cool down an overheating one, making it a key tool for maintaining economic stability.
Check out some examples below:
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Aggregate demand: Direct spending by the government increases demand in the economy, which can boost a country's GDP.
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Employment: Job creation often follows from increased public investment or subsidies to businesses.
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Inflation: Overstimulating the economy can lead to higher prices, and consumers not being able to afford overpriced necessities.
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Interest rates: Persistent borrowing by the government can compete with private borrowing, potentially raising interest rates that will hurt consumers.
Therefore, governments must weigh these factors carefully to ensure that fiscal policy supports sustainable growth without introducing excessive inflation or debt to their economy and in turn, their country.
The intersection of fiscal policy and crypto
In recent years, the relevance of fiscal policy has expanded beyond traditional financial markets into the realm of cryptocurrency. Many investors and analysts now view fiscal decisions—particularly those involving massive stimulus spending or debt accumulation—as catalysts for increased interest in decentralized digital assets.
Take the COVID-19 pandemic, for instance. Who could forget when trillions of dollars in fiscal stimulus were injected into economies around the world to prevent collapse? While these actions were necessary, they also sparked concerns about inflation and the long-term health of fiat currencies. This narrative helped fuel the rise of Bitcoin and other cryptocurrencies as potential hedges against currency debasement and government overreach.
Moreover, fiscal policy is increasingly intersecting with digital finance through initiatives like central bank digital currencies (CBDCs). Governments exploring CBDCs are essentially looking at new ways to implement fiscal tools—such as direct stimulus payments—more efficiently and transparently, using blockchain-inspired technology.
In this light, crypto is no longer just a speculative asset—it’s becoming a lens through which we evaluate the future of fiscal governance and monetary innovation.
Conclusion
Overall, fiscal policy is a fundamental mechanism by which governments manage their economies. Through decisions about spending and taxation, policymakers attempt to stimulate growth, control inflation, and maintain employment. But these decisions are never made in isolation; instead, they ripple through financial markets, influence investor sentiment, and (increasingly) affect emerging sectors like cryptocurrency.
As crypto continues to mature and become integrated into global financial systems, the relationship between fiscal policy and digital assets will likely grow stronger. In turn, it's up to us traders to understand how governments wield fiscal policy, as it offers valuable insight into the economic and technological shifts of tomorrow.
That's all for this week from us at Toobit Academy, folks! We hope you enjoyed this article. For more trading tips, strategy breakdowns, and crypto fundamentals, make sure to check out Toobit Academy — your go-to hub for leveling up your knowledge in the world of digital assets.
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