Fiscal policy is an economic framework used by federal governments to control their spending and taxation, thus influencing the economy. By the government acting to adjust the spending and tax revenue, it can impact the economic results by either lowering or raising the economic activity. For instance, when a federal government runs a budget deficit, it is described as engaging in fiscal stimulation, thus boosting the economy. Conversely, running a budget surplus may mean leading the economy to a recession through fiscal contraction. In this case, the government has two models of setting fiscal policy: altering the level of taxation or modifying the level of spending.
To stimulate demand in the retail sector, expansionary fiscal policy is important. In this case, the expansionary fiscal policy through government increased spending stimulates aggregate demand, thus leading to increased output and employment in the economy. As such, increased employment means the availability of money to spend by those in the employment sector. In this regard, purchases by people increase, subsequently resulting in increased demand for goods and services offered by retailers. When the government reduces its taxation, more disposable incomes are elevated, thus leading to an increase in the consumption of retailers’ goods and services. Moreover, a reduction in taxes affects demand aggregation because many people increase their savings, and as such, a lot of money can be spent from the savings on the retailer’s merchandise.
A combination of government spending and tax reduction also affects retailers’ demand increase considerably. For instance, if government spending is more than the tax revenue, a budget deficit may ensue, which can consequently result in higher interest rates. In essence, retailers would pay more for lines of credit, thus attracting foreign investors through the increased value of the U.S. dollar. This gives the retailers more buying power when purchasing goods and services from foreign suppliers in the local currency.
With low operating costs because of the high purchase power, the retailers can set their prices for their merchandise affordable, thus increasing consumer purchases. According to Reagan, retail business imports approximately 98% of clothing merchandise sold in the U.S. In this regard, fiscal policy impacts the cost of retail business operation, and with reduced taxation, the business expenses reduce. Thus, prices are lowered accordingly. With reduced prices for goods and services, the consumer demand for retail services is elevated, thus aggregating demand for retailer business.