The use of government spending and taxation to influence the economy is known as fiscal policy.
Fiscal policy is typically used by governments to promote strong and sustainable growth and to reduce poverty. During the recent global economic crisis, governments stepped in to support financial systems, jump-start growth, and mitigate the impact of the crisis on vulnerable groups. Leaders of the Group of 20 industrial and emerging market countries stated in their communiqué following their April 2009 London summit that they were undertaking "unprecedented and concerted fiscal expansion.
When it comes to influencing the economy, policymakers have two main tools at their disposal: monetary policy and fiscal policy. Central banks influence the money supply indirectly by adjusting interest rates, bank reserve requirements, and the purchase and sale of government securities and foreign exchange. Governments have an impact on the economy by altering the level and composition of taxes, the extent and composition of spending, and the degree and form of borrowing.
Governments have an impact on how resources are used in the economy, both directly and indirectly. A basic national income accounting equation that measures an economy's output (or GDP) in relation to expenditures explains how this occurs:
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