Fiscal policy and government spending

Fiscal policy is the government's use of spending and taxation to influence the economy. Where monetary policy is run by the central bank, fiscal policy is run by the treasury and the political process — and the two interact constantly.

The two levers

• Spending — building infrastructure, paying salaries, funding social programmes. More spending injects demand into the economy.
• Taxation — taxes pull money out. Cutting taxes leaves more in private hands to spend and invest; raising them does the opposite.

When a government spends more than it collects, it runs a deficit and must borrow, adding to the public debt.

Expansionary vs contractionary

• Expansionary fiscal policy (more spending, lower taxes) stimulates a weak economy but can widen deficits and stoke inflation.
• Contractionary policy (austerity) cools an overheating economy or repairs the budget, but can slow growth.

Why markets watch fiscal credibility closely — especially in Brazil

For an emerging market like Brazil, fiscal discipline is a make-or-break factor for investor confidence. If markets fear the debt is on an unsustainable path:

• The real weakens as investors demand more to hold Brazilian assets.
• Bond yields rise (the government must pay more to borrow).
• The central bank may have to keep the SELIC higher to defend the currency and anchor inflation.

This is why headlines about the arcabouço fiscal (Brazil's fiscal framework), the primary budget result, and debt-to-GDP ratios can move the Brazilian market sharply. Fiscal and monetary policy are two hands on the same wheel — and when they pull in opposite directions, volatility follows.