What is tax control?

Fiscal control is an economic policy in which a government intentionally avoids deficit spending. To exercise fiscal control, a government does not spend more than it can collect in the same period through taxes or the sale of assets. The aim is to avoid the need for borrowing and therefore future interest payments. Political opponents may find it an unfairly neutral-sounding term, preferring to describe some versions of the policy as fiscal conservatism.

Intentionally adopting a policy of fiscal control is effectively positioning oneself in an important political and economic debate about whether governments should borrow to finance public spending. It is possible for a government to spend more than it receives, borrowing money through measures such as issuing bonds. Proponents of this type of borrowing, known as deficit spending, argue that the cost of borrowing is outweighed by the benefits of being able to invest in capital expenditures, such as building new schools, compared to a commercial loan to finance expansion. Advocates of fiscal control argue that such spending is irresponsible and puts public finances under even greater pressure in the future, mainly due to interest payments on loans.

Assessing such policies can be difficult in economic terms. This is because some elements of government spending and revenue vary with business cycles, with no change in economic policy. The main examples are taxes and social spending. This means that during a recession, a government that pursues a policy of economic control may still face a budget deficit. To allow for a fairer comparison, some economists try to adjust expenditure and income measures to account for business cycles.

It can also be difficult to assess whether a policy qualifies as fiscal control when a country already has a large debt or accumulated surplus. A government with a general principle of fiscal control may spend more than it receives over a period, funding the excess of an existing surplus. For this reason, there may be a difference between a government's long-term economic policies and principles and the spending pattern in a given year.

Some of the measures used to achieve the economic objective can be considered as political elements. For example, it could be argued that having high taxes equals a high level of spending is exercising fiscal control, since the balance remains neutral. However, some advocates of fiscal control may always apply a policy of emphasizing lower spending to reduce government involvement in markets. Opponents of such a policy might call it politically motivated and label it fiscal conservatism.

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