Fiscal policy provides a method of managing aggregate demand in the economy.

Fiscal policy involves altering the level of

government expenditure
rates of tax

Reflationary or expansionary fiscal policy

Reflationary or expansionary fiscal policy is designed to increase aggregate demand.

Fiscal policy can be used to boost aggregate demand if there were a problem of demand-deficient unemployment. In this case, the government would

raise government expenditure
cut taxes

For example, by increasing social security payments (such as unemployment benefits or state pensions), domestic consumption should increase.

Deflationary or contractionary fiscal policy

Deflationary or contractionary fiscal policy is intended to lower aggregate demand.

Aggregate demand can be reduced by

cutting government expenditure
raising taxes

This will reduce consumer expenditure.

Contractionary fiscal policies are used to reduce inflationary pressures during an economic boom

Fiscal policy is also used to redistribute income and wealth in the economy.

Some countries have quite high rates of income tax to reallocate resources from wealthier individuals to the poorer members of society