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What Does Fiscal Policy Mean? Government spending makes up a whopping 20% of all spending in the American economy, including the salaries of all government employees, government contracts to private companies, and military spending. This is all paid for by taxes, meaning more than 1/3 of all economic activity filters through the public sector in some way.
This means government taxing and spending will have a huge impact on the rest of the economy, and so the way people and businesses are taxed, and how the money is spent, is centered on how it impacts the rest of the economy. The way the government organizes these taxes and spending to influence the economy is called the Fiscal Policy.