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Fiscal policy: Congress, taxes and spending
· Concept
Fact, law or dataA rule, statute, definition or measured number.
How the government uses taxes, spending and borrowing to steer the economy; set by Congress and the President, not the Fed.
See it on the Money & Finance map →How it works
Congress writes tax law and spending bills; the President signs or vetoes. About 60% of outlays are mandatory programs such as Social Security, Medicare and Medicaid, which run on autopilot; most of the rest is set in yearly appropriations, plus interest on the debt. In fiscal 2025 Washington spent about $7 trillion and collected about $5.2 trillion, borrowing the gap. In slumps, falling tax receipts and rising unemployment benefits cushion demand automatically; Congress can add stimulus, as in 2008 and 2020.
Why it matters
It sets the deficits the Treasury must borrow, which move bond yields and mortgage rates, and the tax rules, from depreciation to 1031 exchanges, that shape real-estate returns.
Think of it like
If the Fed is the lender setting the rate, fiscal policy is the owner's budget: what to spend, what to charge and how much to borrow.
Facts, rules and data
The Treasury's Monthly Treasury Statement and Congressional Budget Office data; the Congressional Budget Act of 1974 sets the annual process. Gross federal debt neared $40 trillion in 2026.
Debates and risks
How much a dollar of stimulus or tax cuts raises output, the 'multiplier', is debated, as is how much debt the US can carry before rates climb.
Inside this (7)
Connections (8)
▸Keynesian economics (John Maynard Keynes) recommends recession spending through Fiscal policy: Congress, taxes and spendingMainstream view
The connection
Keynes's remedy runs through fiscal policy, which in the US means Congress. Part works automatically: in a slump, unemployment benefits rise and tax receipts fall without any vote, cushioning incomes. The rest is discretionary stimulus, such as rebates, aid to states and public works. In booms the theory says run surpluses, a step governments seldom take.
When and why
Britain and the US from the late 1930s; applied widely after the war, then in the 2009 Recovery Act ($787 billion) and the 2020 CARES Act ($2.2 trillion).
How solid is the link?
Studies of wartime spending, state-level transfers and the 2009 stimulus find positive multipliers, typically around 0.5 to 2, larger in deep slumps.
Debates and risks
Whether discretionary stimulus arrives in time, given legislative delays, and how much today's high federal debt limits room for the next round, is debated.
▸COVID-19 crash and rescue (2020) drew about $5 trillion in relief via Fiscal policy: Congress, taxes and spendingFact, law or data
The connection
Congress passed a series of relief laws in 2020–21 worth about $5 trillion: stimulus checks, extra weekly unemployment pay, forgivable PPP loans to businesses and aid to states. After-tax household income actually rose in 2020, and the federal deficit hit about $3.1 trillion, roughly 15% of GDP.
When and why
Washington, March 2020 to March 2021: the CARES Act ($2.2 trillion), the December 2020 package ($900 billion) and the American Rescue Plan ($1.9 trillion).
How we know
The laws themselves, CBO cost estimates and Treasury payment data; PPP alone approved about $800 billion in loans.
Debates and risks
Whether the 2021 American Rescue Plan was too large and fueled inflation, and how much relief was lost to fraud, are debated.
▸Fiscal policy: Congress, taxes and spending accumulates deficits into The national debt and federal deficitsFact, law or data
The connection
Congress sets spending and tax laws; when spending exceeds revenue, the Treasury borrows the difference by selling securities, and that year's deficit adds to the debt. In fiscal 2025 the government spent about $7.0 trillion and collected about $5.2 trillion. Interest on the accumulated debt then adds to future deficits.
When and why
US-wide since 1790; the last surplus year was 2001, and the deficit peaked near $3.1 trillion in pandemic-year 2020.
How we know
Treasury's Monthly Treasury Statement and CBO budget reports; the debt rises each year by roughly the deficit plus other financing needs.
Debates and risks
Economists disagree on how fast deficits should shrink and whether to rely on tax increases, spending cuts or growth; no plan has broad political support.
▸Fiscal policy: Congress, taxes and spending works alongside Monetary policy: steering interest rates and creditFact, law or data
The connection
Congress sets taxes and spending; the Fed sets interest rates. They interact: big deficits add demand and borrowing, which can push the Fed to keep rates higher, while low rates make government debt cheaper to carry. In 2020 both pushed together, with relief checks and Fed bond buying.
When and why
Washington: Congress and the Treasury on one side, the Fed on the other; the 1951 Treasury–Fed Accord separated their roles.
How we know
CBO budget data and Fed statements regularly discuss each other's effects; the 2020–21 policy mix is well documented.
Debates and risks
With the national debt above $38 trillion since late 2025, economists debate 'fiscal dominance': debt pressures limiting the Fed's freedom to fight inflation.
▸Fiscal policy: Congress, taxes and spending bailed out union pension plans through PBGC: the federal pension insurance agencyFact, law or data
The connection
Hundreds of union multiemployer pensions, hit by industry decline and the 2008 crash, were running out of money, and PBGC's own multiemployer fund was projected to fail by 2026. In 2021 Congress used general tax revenue, paid through PBGC, to give the weakest plans grants big enough to pay full benefits through 2051.
When and why
Washington, March 2021, in the American Rescue Plan Act; the Teamsters' Central States fund got the largest grant, about $36 billion, approved in late 2022.
How we know
The American Rescue Plan Act's Special Financial Assistance provisions; PBGC's published approvals for each plan, totaling tens of billions of dollars.
Debates and risks
Critics called it an unconditional bailout that could invite future rescues; supporters said it spared hundreds of thousands of retirees deep pension cuts.
▸Pandemic aid fraud: PPP and unemployment drained billions from emergency Fiscal policy: Congress, taxes and spendingFact, law or data
The connection
Fiscal policy works through programs, and pandemic relief showed that controls decide how much money reaches its target. Estimated losses equal several percent of total relief, and the experience pushed Congress and agencies toward identity checks and data matching before payment.
When and why
Relief laws of 2020–21, with oversight by the Pandemic Response Accountability Committee, the GAO and inspectors general.
How we know
GAO and inspector general audits quantifying improper and fraudulent payments program by program.
Debates and risks
How much fraud is an acceptable price for getting emergency money out fast has no settled answer, and it shapes debates over future relief.
▸Fiscal policy: Congress, taxes and spending spends and collects taxes through Treasury General Account (TGA): the government's account at the FedFact, law or data
The connection
Every federal tax payment moves money from a taxpayer's bank, and from the banking system's reserves, into the TGA. Every federal payment moves it back. When spending exceeds taxes, Treasury sells securities to refill the account. So budget decisions in Congress show up daily as flows in and out of the TGA.
When and why
Daily, over Fedwire; the biggest swings come on quarterly tax dates, above all mid-April, and on large benefit-payment days.
How we know
The Daily Treasury Statement itemizes deposits by tax type and withdrawals by agency.
Debates and risks
MMT economists say spending comes first and taxes follow; mainstream economists see taxes and borrowing as funding it. The daily flows look the same either way.
▸Fiscal policy: Congress, taxes and spending can spook bond markets, as in The 2022 UK gilt crisis: the mini-budget and pension LDI fundsFact, law or data
The connection
Governments borrow by selling bonds, so a fiscal plan must look affordable to buyers. The mini-budget offered about £45 billion of unfunded tax cuts, skipped the usual independent forecast, and came while the Bank of England was fighting 10% inflation. Investors demanded much higher yields to hold gilts, raising borrowing costs for the government and homebuyers alike.
When and why
Announced September 23, 2022, by Chancellor Kwasi Kwarteng under Prime Minister Liz Truss; mostly reversed by his successor Jeremy Hunt in October.
How we know
Gilt yields and sterling moved sharply within hours of the statement, and UK lenders withdrew hundreds of mortgage products that week (Moneyfacts).
Debates and risks
Whether markets punished the tax cuts themselves or the lack of a credible plan, and whether the US faces similar risk, is debated.