Fiscal policy refers to the use of economic tools such as taxation and

government expenditure by the government to manage aggregate

demand as well as achieve macroeconomic aims such as high
employment and economic growth.
The government’s annual budget is a forecast of the governments
revenues and expenditures for a set period of time usually a year and it
is also a statement of their fiscal policy. Legislative consent is need for
the budget. However, the budget may be subject to political pressure
from third persons.
Three distinct effects on government budget can be seen when tax and
spending changes are made by the government, namely budget deficits,
budget balances and budget surplus. Deficits occur when tax revenue
undermines government spending, meaning the government is lacking
funds. To fix this, government may increase tax rates in the country to
bring up the revenue or decrease their expenditure. Balances mean that
the tax revenue equals government spending. Surplus happens when
tax revenue exceeds government spending meaning more money is
being gained than spent. Government may increase their spending to
strengthen the country’s economy further through construction of
schools and other public corporations and other lacking sectors in the
economy.
The effects of fiscal policy can achieve government macroeconomic
aims with ease. For example, price stability can be attained by reducing
indirect tax like VAT, increasing direct tax like salary tax and reducing
government spending. Essentially lowering prices whilst reducing
purchasing power is a good way to control inflation which would affect
prices. Exchange rate can also be strengthened and stabilized by
increase direct tax and reduce government spending. Doing this will
curb the incentive to import products from other countries, which
would depreciate the currency, but also allows government to build
facilities, with the increased tax revenue, to manufacture more
products to be exported which would help appreciate the currency.