What is Fiscal Policy
The government's spending lever — and why it matters less than monetary
- Define fiscal policy and its two main levers
- Tell the difference between fiscal and monetary policy
- Predict FX reaction to a major budget announcement
The UK's mini-budget on 23 September 2022 caused GBP to crash 4% in 48 hours. No central bank meeting, no surprise data — just a Chancellor announcing tax cuts. That's fiscal policy doing what monetary usually does.
Fiscal policy in one sentence
Fiscal policy is what the government does with taxes and spending. Two levers: how much money it pulls out of the economy (taxes), and how much it puts back in (spending). Done well, it smooths business cycles. Done badly, it spooks the bond market.
Sets the price of money (interest rates). Operates monthly. Independent of politics. Slow, technocratic, predictable.
Sets the quantity of state spending + tax. Operates yearly (budgets). Political. Lumpy, headline-driven, can move FX violently when surprising.
Why it matters less day-to-day
On a typical week, monetary news dominates FX because it directly moves yields. Fiscal news only spikes FX when it's a surprise large enough to spook gilt/bond markets. A predictable budget = no FX move. An unfunded tax cut = currency punished by the bond market.
A government announces a £50bn unfunded tax cut. Most likely currency reaction?
- Fiscal = taxes + government spending
- Monetary moves FX daily; fiscal moves it on big-budget moments
- Predictable budgets = no move
- Unfunded promises = bond market punishes the currency
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