Fiscal policy is how the government uses taxes and spending to manage the economy. While the central bank handles monetary policy, the government (through the finance ministry) handles fiscal policy. The two work together — sometimes in harmony, sometimes in tension.
During a recession, the government uses expansionary fiscal policy — cutting taxes and increasing spending to stimulate demand. During inflation, it uses contractionary fiscal policy — raising taxes and cutting spending to cool the economy. The US spent over $5 trillion in fiscal stimulus during COVID-19.
The trade-off: expansionary fiscal policy creates budget deficits and increases national debt. The US national debt exceeds $35 trillion; India's fiscal deficit runs around 5-6% of GDP. Economist John Maynard Keynes argued that government spending is essential during downturns, while others warn that excessive debt burdens future generations.