Fiscal policy is a core economic tool of US national government. Understanding who controls it, how it moves through institutions, and what competing theories prioritise helps explain debates over growth, inflation, unemployment, and deficits.

What Fiscal Policy Is and Who Makes It

In the United States, fiscal policy is primarily made through laws that change tax rates, spending levels, and budget priorities. The Constitution gives Congress the “power of the purse,” but the president is a central agenda-setter and negotiator.

Congress’s Fiscal Powers

Congress shapes fiscal policy through:

• Tax legislation (House-originated revenue bills, committee work, final passage in both chambers)

• Spending legislation

  • Authorisation laws create/continue programmes and set goals

  • Appropriations laws provide actual funding for agencies and programmes

• Budget resolutions that establish overall spending and revenue targets (not signed by the president)

• Votes on major fiscal constraints, including the debt limit (statutory cap on total federal borrowing)

The President’s Fiscal Powers

The president influences fiscal policy by:

• Proposing a national budget (through the Office of Management and Budget, OMB)

• Using the State of the Union and bargaining to set priorities

• Signing or vetoing tax and spending bills; veto threats often shape final terms

• Directing executive agencies on implementation once funds are appropriated

How Fiscal Policy Moves Through the Budget Process

Fiscal policy outcomes reflect institutional competition and compromise:

• The president submits a budget request that signals priorities.

• Congressional budget committees propose a budget resolution that sets topline targets.

• Authorisation and appropriations committees draft legislation within those targets.

• Party leadership and key actors (committee chairs, the Speaker, Senate leaders, the president) negotiate trade-offs, especially when government funding deadlines approach.

This Congressional Research Service timeline/table summarizes the intended sequence of key federal budget steps (president’s budget submission, congressional budget resolution targets, and appropriations timing). Seeing the calendar structure helps explain why shutdown threats, continuing resolutions, and bargaining crunches are recurring features of U.S. fiscal policymaking.Source

• Independent analysis from bodies like the Congressional Budget Office (CBO) can shape debate by projecting costs, growth, and deficit effects.

  EQUATION

  $Budget\ Balance = Revenues - Outlays$

  $Revenues$ = Total federal tax and other receipts (dollars)

  $Outlays$ = Total federal spending (dollars)

A negative budget balance indicates a deficit (requiring borrowing), while a positive balance indicates a surplus.

The chart plots federal revenues and outlays as shares of GDP over time, making deficits visible whenever outlays exceed revenues. This visualization links the identity Source

Competing Approaches: Keynesian and Supply-Side Positions

Expansionary fiscal policy (higher government spending and/or lower taxes) is modeled as a rightward shift of aggregate demand from $AD_0$ to $AD_1$. The new equilibrium moves closer to potential GDP, illustrating how Keynesian stimulus aims to reduce recessionary unemployment, often with some upward pressure on the price level. Source

Keynesian-oriented fiscal policy generally supports:

• Deficit spending during downturns to boost demand and reduce unemployment

• Temporary tax cuts or increased government spending (often called “stimulus”)

• Reduced spending or higher taxes during high inflation to cool demand (politically difficult)

Supply-Side Fiscal Views

Supply-side arguments emphasise incentives and long-term growth, often supporting:

• Lower marginal tax rates to encourage work, saving, and investment

• Policies aimed at expanding production (the “supply” of goods and services), rather than primarily managing demand

• The claim that growth can partially offset revenue losses from tax cuts, though the size of that effect is contested in policy debates

These approaches become concrete in fights over whether to prioritise short-term job creation, deficit reduction, or long-run growth through incentives.

Why Fiscal Policy Is Politically Difficult

Fiscal policy is not purely technical; it is shaped by democratic conflict and institutional friction:

• Time lags: Passing laws takes time; effects may arrive after conditions change.

• Divided government: Different party control of Congress and the presidency increases bargaining costs and the likelihood of stalemate.

• Mandatory vs discretionary spending: Large budget shares are effectively “locked in” by eligibility rules, narrowing room for rapid adjustments.

• Deficit politics: Arguments over debt, intergenerational fairness, and interest costs influence what coalitions are possible.

• Distributional conflict: Tax and spending choices create winners and losers, so fiscal policy debates often reflect broader ideological priorities.