Two major fiscal policy tools are government spending and taxation. Government, through its fiscal policy changes the composition of taxation in order to maintain sustainable growth of the economy. Taxation system is the main source of earning of any government. As a result it is very important to control the system in accordance to the requirement of the economy. Governments control the taxation system through its fiscal policy. Another tool is government spending. It is also important in the context of the economy of the country. Importance and applicability of government spending has become clearer during the period of current global financial meltdown when governments have spent millions of dollars to save their respective economies and important organizations who were in trouble.
It is found that the budget deficit of United Kingdom in the period of 2008-09 was around 90 billion Euro. It is also found that the difference between the tax receipts and government spending was almost 12 billion euro (Seager, A. 22 April 2009). According to EU Business, budget deficit of Germany will be more than 4% of total GDP in 2010 (EU Business, 14 January 2009).
According to European Union’s growth and stability pact, each and every EU members must maintain its public deficits lower than 3% of GDP. Member countries must also keep their public debt below 60% of total GDP.
US fiscal policy is found to be very much aggressive as compared to the fiscal policies adopted by the EU members. According Timothy Geithner who is the Treasury Secretary of U.S., the country will see more aggressive fiscal policy in future (Reuters, Feb 3,