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Conversely, contractionary fiscal policy—a decrease in government spending, an increase in tax revenue, or a combination of the two—is expected to temporarily slow economic activity. Expansionary Fiscal Policy . Recessions can have serious negative consequences for both individuals and businesses.
By contrast, fiscal policy is often considered contractionary or “tight” if it reduces demand via lower spending. Besides providing goods and services like public safety, highways, or primary education, fiscal policy objectives vary.
Contractionary fiscal policy does the reverse: it decreases the level of aggregate demand by decreasing consumption, decreasing investments, and decreasing government spending, either through cuts in government spending or increases in taxes.
