Growth above 2 percent to 3 percent (for the United States) per year can result in undesirable consequences for an economy. First, rapid growth leads to rapid inflation (a consistent rise in the level of prices in an economy). Increases in aggregate demand past full-employment GDP puts pressure on prices and wages throughout the economy, which leads to inflation. Two inflationary periods took place, during World Wars I and II, when growth and increases in aggregate demand were rising rapidly due to needs from the war effort. Unsustainable growth can lead to economic crises when the engine of rapid growth suddenly cuts out. Second, an unemployment rate that is too low, below the natural rate of unemployment, causes labor shortages and difficulty in placing skilled labor in the right jobs. There are less unemployed workers to fill new jobs as the economy expands to meet high demand. In addition, the lack of workers pushes wages higher, which further leads to inflation.
As a result, when governments view growth or inflation as too rapid, they embark on contractionary fiscal policies. These generally involve measures contradictory to expansionary policies: governments raise taxes and cut government spending. Cuts in government spending can take several forms, with different impacts. Consumer demand might be tempered by cuts to social welfare spending or unemployment insurance, for example. Government purchases might be cut to reduce business profits, providing a disincentive to retain and hire workers. Income tax increases, likewise, restrict the amount of disposable income (money after taxes and necessities such as rent) that households have available to spend on consumer goods and encourage saving. Higher corporate tax rates limit business investment and expansion. Whatever measures a government takes, the intent is to reduce aggregate demand by restricting the amount of money in the economy.Because contractionary policies involve tax increases and cuts to government spending on purchases and welfare programs, contractionary fiscal policies are generally politically unpopular.