What Is Fiscal Control?

Fiscal control is an economic policy in which a government intentionally avoids deficit spending. To exercise fiscal control, a government spends no more than it can raise in the same period through taxes or by selling assets. The aim is to avoid the need for borrowing and thus future interest payments. Political opponents may consider it an unfairly neutral-sounding term, and prefer to describe some versions of the policy as fiscal conservatism.

To intentionally adopt a policy of fiscal control is effectively to take a position in a major political and economic debate of whether governments should borrow to finance public spending. It is possible for a government to spend more than it receives, by borrowing money through measures such as issuing bonds. Supporters of such borrowing, known as deficit spending, argue that the cost of borrowing is outweighed by the benefits of being able to invest in capital spending such as building new schools, and liken it to a business borrowing to finance expansion. Supporters of deficit control argue that such spending is irresponsible and puts public finances under even greater pressure in the future, particularly taking into account interest payments on the borrowing.

Assessing such policies can be difficult in economic terms. This is because some elements of government spending and revenue vary with economic cycles, without a change in economic policy. The main examples are taxes and welfare spending. This means that during a recession, a government operating a policy of economic control may still experience a budget deficit. To allow for a fairer comparison, some economists attempt to adjust measures of spending and revenue to take into account economic cycles.

It can also be difficult to assess whether a policy is classed as deficit control when a country already has a large debt or surplus built up. A government with a general principle for fiscal control may be able to spend more than it receives for a period, financing the excess from 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 particular year.

Some of the measures used to achieve the economic goal may be viewed as having a political element. For example, it could be argued that having high taxes that equal a high level of spending is to exercise fiscal control, as the balance is still neutral. Some advocates of fiscal control, however, may always operate a policy of putting the emphasis on decreasing spending to reduce government involvement in markets. Opponents of such a policy may call this politically motivated and label it as fiscal conservatism.