Fiscal and monetary policies can lead to higher or lower budget deficits. Fiscal policies include the use of taxes (revenue collection) and government expenditure as the moves by the government to influence the economy. These two moves play a bigger role in impacting budget deficit.
Increase in taxes leads to increase in government revenue and this reduces budget deficit. On the other hand, a decrease in taxes set by the government leads to decreased government revenue and thus increased budget deficit (Eshag, 2007).
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