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Fiscal Policy and Economic Instability

            Fiscal policy is how governments influence the economy by altering their tax rates and spending levels. The policy relates either positively or negatively to economic instability depending on how it is employed. However, in most cases, the policy increases economic fluctuations instead of reducing them. According to Kousar et al. (56), fiscal policy contributes significantly to financial instability. Sometimes governments can choose to lower tax rates and increase spending to induce citizens to work more and boost the economy. In turn, more low-skilled workers join the labor force; people start saving, companies start investing domestically rather than abroad because the tax rates are welcoming (Tun 110). Nonetheless, this can lead to economic instability because most workers will relax and reduce supply, knowing that their after-tax income is high. Fiscal policy can also increase budget deficits slowing down economic growth. Reduced tax rates encourage government borrowings on private investments, reducing the future income of the citizens from the same investments.

Conversely, the taxes can increase, and spending levels decrease to manipulate demand and slow down an economy that is growing quickly. In this case, the fiscal policy tries to ensure economic stability by making the economy grow at the expected rate. Decreased spending slows down economic activity because the government reduces its amount of purchases from the private sector. Besides, higher taxes reduce people’s disposable income further forcing them to reduce spending. Through this, the economy can grow at the expected rate. The policymakers can avoid financial instability by reducing the fiscal stimulus (Deskar-Škrbić 95). Therefore, fiscal policy can have positive and negative relationships on economic instability. Fiscal stimulus and fiscal contraction can spur or slow down economic activity. However, when not controlled, they can result in instability.for generalizing the study’s findings.