Expansionary Fiscal Policy: Overview, Risks, Example

By Frank Bass – Updated Apr 2, 2025 at 7:13 PM

Key Points

Expansionary fiscal policies include increased federal spending, reduced taxes, and direct payments.
Issues like inflation and budget deficits often arise from these policies.
Despite drawbacks, these policies can boost trust in government during downturns.

Over the last five years, both contractionary and expansionary policies have whipsawed households nationwide. The COVID-19 pandemic spurred a massive effort by the U.S. government to expand the economy. As inflation heated up, officials adopted monetary policies to mitigate the worst effects of expansionary fiscal policies. Here, we'll examine the tools and history of expansionary fiscal policies.

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An infographic comparing fiscal policy and monetary policy. — Image source: The Motley Fool.

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Expansionary fiscal policy, however, can have its downsides:

Inflation. The $1.9 trillion American Rescue Plan, passed about one year into the COVID-19 pandemic, has been blamed for pushing inflation to its highest levels since the 1980s. The massive influx of money into the economy gave people more money to spend, which led to shortages -- and higher prices -- for items ranging from used cars to toilet paper.
Budget deficits. Because the U.S. is the world's reserve currency, budget deficits are less of a concern than for other countries. Even so, deficit spending means the U.S. Treasury must borrow more money and pay interest on its borrowing. The Congressional Budget Office estimates that interest payments on the national debt, currently $952 billion, will rise to $1.8 trillion by 2035.
Interest rates. If the government borrows enough money to fund its spending, the higher costs of borrowing can cause a "crowding-out" effect, making private investment more difficult as interest rates rise.

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About the Author

Frank Bass is a contributing Motley Fool stock market analyst and editor covering energy, healthcare, consumer, and financial sectors. Frank has decades of experience in financial journalism, holding reporting and editing roles at The Wall Street Journal, The Associated Press, and Bloomberg. He also currently edits research on the global energy transition. He holds a bachelor’s degree in journalism from Texas Tech University and is a graduate student at the University of Alaska Fairbanks. Fun Facts: Frank has hiked The Long Trail in Vermont from end to end, and currently lives in a semi-dry cabin in Interior Alaska.

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