FI Pillar: Fiscal Policy
Fiscal Policy assesses how government spending, taxation, and debt management influence growth, inflation, and liquidity. This pillar examines the sustainability and direction of fiscal trends that shape economic and market outcomes.
Why Fiscal Policy Matters
Fiscal actions determine the scale of government support or restraint in the economy. Expansionary fiscal policy can stimulate growth and support earnings, while contractionary measures slow demand to curb inflation. The mix of spending, taxation, and borrowing also affects debt sustainability and long-term interest rates. Understanding fiscal direction helps investors anticipate macro tailwinds and headwinds across sectors.
Key Metrics and Their Importance
1. Budget Trajectory
Why itโs important: The federal budget reflects national priorities and fiscal stance. Persistent deficits can fuel inflation or crowd out private investment, while surpluses may tighten liquidity.
Factors involved: Federal receipts and outlays, budget balance as % of GDP, and fiscal multipliers from discretionary spending programs.
2. Deficit & Issuance Mix
Why itโs important: Deficits drive Treasury borrowing needs, affecting yields and liquidity. The issuance mix between bills, notes, and bonds impacts term premiums and risk appetite.
Factors involved: Monthly Treasury statements, CBO projections, and refunding announcements. Larger deficits typically steepen yield curves and boost inflation expectations.
3. Tax Policy
Why itโs important: Tax policy shapes disposable income, investment incentives, and corporate behavior. Adjustments in tax rates or credits can shift growth and equity valuations.
Factors involved: Corporate vs. individual tax rates, capital gains treatment, and business incentives (e.g., accelerated depreciation, R&D credits).
4. Spending Bills & Continuing Resolutions (CRs)
Why itโs important: Government spending bills determine fiscal impulse and sectoral support. Delays or shutdowns can disrupt confidence, while large appropriations fuel growth.
Factors involved: Infrastructure and industrial policy programs (e.g., CHIPS Act, IRA), discretionary vs. mandatory spending, and timing of appropriations.
5. Industrial Policy Incentives
Why itโs important: Targeted fiscal measures shape competitiveness, job creation, and sector performance. Incentives like energy credits or manufacturing subsidies support long-term growth.
Factors involved: Implementation of CHIPS, IRA, and infrastructure programs; capital expenditure multipliers; and private-sector matching investment.