Fiscal policy is more covered and controlled by governments themselves, so whoever's won the last election and is in power, and it controls government expenditure. Government can also stimulate an economy by launching a number of projects and enhancing government expenditure. The theory is if they build airports and hospitals, lots of private contractors get a lot of work. So when you have a real quite season and there's a major loss of confidence in the private sector, the government steps in and creates a bit of spark to build a better flame, and, by doing that, they do some spending.
The stimulus spending done by government is, in fact, taxpayers' money and is often put on debt. So it comes at a cost. The notion that, "Yes, go build a few more hospitals and airports," a very positive notion, good for trade, business, and looking after the citizens. However, the debt that is created has to be serviced, and it is proven by Reinhart and Rogoff, despite minor quibbles about a calculation error in one of their studies. The underlying premise is that, beyond a certain point of debt, once you have too much debt at a government level, you're growth is stymied because a large element of the proceeds from tax payments, which is the government's income, has to go towards servicing debt and not toward provision of service.
So there is no free lunch. Spend and create money now and create a bit of spark and heat in the economy at the government level now and you create debt, which has interest payments that take from future revenue in tax returns. If you reach a certain point where people no longer believe that you are going to easily service that, your interest rates on your own debt start to go up. Governments default, regularly have, particularly third and second world nations. And we are going to reach a point where the first world superpowers are, in effect, defaulting, whether it is by currency destruction and destroying the value of their currency, so that they're paying back their debt in diminished dollars, pounds, and Euros, or whether by nature of just saying, "We can't pay any more. We need to restructure. Sorry," in other words, defaulting out and out. Either way, both are defaults. One is an honest default, and the other is one of slight of hand over time.
So this is fiscal policy. Governments can spend to stimulate. This is usually encouraged by Keynesian type thinking - whenever there is a downturn to simulate activity in an economy and get the private sector going again. However, as I've pointed out, it comes at a cost. When you reach a point, as we are now, where there's far too much indebtedness, you know you've run out of policy space and tools to work, and that is when a reset moment, like I believe we will face, is coming.
But the idea of this is not to be too overly forecasting in terms of what we do, but to explain that government expenditure is deemed a fiscal policy tool. Pricing of credit by a central bank is a monetary policy tool. And to stimulate economies, we regularly use a combination there of both, so you'd do government expenditure and very low interest rates. Currently, we have high levels of government expenditure and very low interest rates, yet we're still not recovering. Part of the problem is over-indebtedness, loss of confidence in the consumer, and potential problems.
So I hope this is useful, and I look forward to speaking to you again soon on other economic concepts.