Expansionary fiscal policy is increases in government spending or tax cuts designed to increase aggregate demand and lift the economy out of a recession. An expansionary policy is the most common type of fiscal policy governments pursue. When the economy is in a healthy growth pattern, there is generally no need—or political pressure—for the government to intervene in the economy. The need for government intervention arises in the instance of a recession (a decline in real gross domestic product [GDP] for two consecutive quarters or more) or a depression (extended recession), so most government interventions take the form of measures that will increase spending and reduce taxes to boost aggregate demand. The overall goal of an expansionary policy is to return the economy to a healthy growth rate, the rate at which the economy is expanding, at around 2 percent to 3 percent per year for the United States (this number varies for different countries' economies).
An expansionary policy increases the amount of money available to companies and households in an economy. This is achieved through the two main methods of fiscal policy: increasing government spending and cutting taxes. Increased government spending boosts the economy by increasing aggregate demand, which lowers unemployment (the percentage of the labor force who are looking for work), boosting wages. According to the spending multiplier concept, consumption, as a result of spending, will increase future consumption and additionally increase the GDP. For instance, if the government invests $1 million on an infrastructure project, it is contributing more than $1 million to the economy because the project requires the hiring of workers, who receive income. In turn, their income is spent elsewhere and that money spent becomes another person's income, and so on. The benefit of that project expenditure, then, is multiplied.
Tax cuts work to boost the economy by increasing the amount of money available to households and businesses, encouraging consumer spending and business investment. The focus is generally on cutting income taxes for individuals, but tax cutting is not exclusive to just income taxes. In a developed economy such as the United States, consumer spending accounts for about 70 percent of GDP. As a result, the most commonly used fiscal policy measures in an expansionary policy act directly to stimulate consumer spending.An expansionary fiscal policy is attractive to policymakers for several reasons. It allows them to react quickly to developing economic crises. In periods of high unemployment, governments can invest directly to hire workers and drive up wages. The best example of this in U.S. history took place during the Great Depression, a period of serious economic downturn in the 1930s. President Franklin D. Roosevelt's administration created the New Deal, which used expansionary policy to create programs and hire workers to try to end the Great Depression. The government can also boost unemployment benefits, which mitigate the effects of high unemployment by putting cash in the hands of the unemployed.