Question

What is the best government fiscal policy and why?

Answer 1

The best government fiscal policy is the required  balance between the taxes and expenditure of the government.

Now, taxes are a source of revenue of the government and spendings are source of costs for the government.

If the economy is undergoing recession, there is a need of greater economic stimulus. This will come either through lesser taxes or more spendings. In other words, government needs to have a budget deficit so that the economic activity picks up again. This will be the best fiscal policy in case of contraction or recession.

If the economy is undergoing expansion, the best fiscal policy will be to tax people more so that they consume less and reduce government spendings so that the inflationary pressures are contained. Having a budget surplus will be the best fiscal policy in this case.