How does Keynesian Fiscal Policy Differ from Supply Side-side Fiscal Policy?

Fiscal policy is the use of government spending, taxation and the government's budgetary position. It is often associated with Keynesian economists, between the years of 1950 and 1970 the UK government used Keynesian fiscal policy to manage the level of aggregate demand to achieve macroeconomic policy objectives. As government spending (G) is one of the components of aggregate demand [AD=C+G+(I-X)], an increasing in government spending or a decrease in government taxation would cause a rightward shift of aggregate demand and an increase in the budget deficit.


Fiscal policy is primarily used as a supply-side policy. It is used to increase the economy's ability to produce and supply goods, through creating incentives to work, save, invest and to be entrepreneurial) such as cutting income tax rates, not to stimulate aggregate demand but to create supply-side incentives in the economy. Its aim is to shift the economies long run supply curve to the right, increasing the potential output.

Recent UK governments have believed that using fiscal policy in a demand-side way to stimulate or reflate aggregate demand to achieve growth and full employment is, in the long run, inefficient and damaging. It is said the growth from explanatory fiscal policy only occurs in the short term and that it mainly impacts on inflation. Supply-side economics and fiscal policy have also been used to create stability in the economy, so that economic agents, particularly businesses, are not subject to sudden susurprisesn the form of unexpected tax changes.