What is a contractionary fiscal policy?

A contractionary fiscal policy is when the government decreases expenditure and/or increases taxes in order to decrease a budget deficit or increase a budget surplus. Fiscal policy refers to a government's use of revenue to influence the nation's economy. This can be done through expenditure (providing national services such as roads and education), the sale of fixed assets (land, privatizing public services) and taxation (collected from citizens).

Contractionary fiscal policies are often used to combat inflation by decreasing the amount of money in the economy. It is also used to reduce government debt. Contractionary fiscal policies allow governments the ability to provide more services in the future.