How does fiscal policy affect inflation, and why is it sometimes harder to implement than monetary policy?
Answer (1)
Fiscal policy is the government’s use of spending and taxation to influence the economy. It plays a major role in inflation control, especially when coordinated with monetary policy. If inflation is high, the government can use contractionary fiscal policy—by reducing government spending or increasing taxes—to slow down demand. Less money in people’s pockets means less spending, and this helps control rising prices.However, fiscal policy is often harder to implement than monetary policy for several reasonsPolitical Process – Unlike the central bank, which can decide quickly to raise interest rates, fiscal policy changes require approval from Congress. This can take time, especially if politicians disagree on whether to cut spending or raise taxes. In the Philippines, proposals to raise taxes or reduce the national budget often lead to long debates.Unpopularity – Fiscal policies that control inflation are usually unpopular. No politician wants to raise taxes or cut public projects, especially before elections. But without these tough decisions, inflation can worsen.Lag Time – Even after fiscal policy is approved, it takes time to see the effects. For example, if the government reduces spending on infrastructure, it might take months before demand in the economy actually slows down.A real-life example in the Philippines is the TRAIN law, which aimed to restructure taxes. While it increased revenue, it also led to short-term inflation because higher fuel taxes increased transport and food prices. Policymakers had to balance the need for revenue with the need to keep inflation low.In summary, fiscal policy can help manage inflation, but it is often slower, more political, and harder to apply quickly compared to monetary tools like interest rate changes.
