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Demand Management and Fiscal Policy Fiscal policy is the manipulation of aggregate demand using taxation and or government spending. The government tends to make most of its fiscal decisions in the annual budget, usually announced in March of each year. However, there are a number of problems in using fiscal policy to control aggregate demand - one of the most significant is the problem of time-lags. 1. Time Lags Many aspects of fiscal policy have a delayed effect on aggregate demand. Changing the fiscal stance can take some time to achieve. For example switching to an expansionary fiscal policy through increased government spending can take some time before the full multiplied effects are felt on the economy. If the government announced increased health service spending, there could be considerable delays, as various committees decide how best to allocate the new funding. Then, if some extra construction work is planned, contracts need negotiating and awarding,...

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