Fiscal policy is the other major economic instrument available to government to manage public expenditure and taxes. Clearly, fiscal policy has many aims and, here, we can only gloss over their complexities. According to Richard Musgrave's classic definition (Musgrave 1959), fiscal policy has three main functions: (1) the production of public goods; (2) the redistribution of these goods; and (3) macroeconomic stabilization. Here, we shall chiefly consider support for household income and stabilization of economic activity, that is, macroeconomic stimuli of the economy, which occur not just in times of recession, but more frequently whenever required by political imperatives, which of course includes pre-election periods.

Politicians, for electoral purposes or to maintain the consensus in favour of the current government, frequently offer aid and subsidies to their citizens. Once disbursed, it is difficult to eliminate these transfers. As time passes, their recipients become used to them and their withdrawal would likely result in huge disappointment and resentment. So, aid that is designed originally to be temporary during difficult periods, can often become permanent. A partial testament to that is how difficult it is in many countries to remove some of the fiscal programmes initiated to support the economy hit by the Covid-19 pandemic. An additional complication is that, often, such aid is financed by a deficit in order not to increase the tax burden (which, also, would result in a discontented citizenry); thus, it is not uncommon for the state to find itself with a budget that is chronically in shortfall.