Fiscal policy

The instruments are budgets, tax rates, transfers and public investment, and they are enacted through law, so changes travel on a legislative calendar and reach the economy with long and uneven lags. That is the cleanest way to separate it from monetary policy: a different institution, a different instrument and a different speed. The two can pull in the same direction or against each other, and periods where they do the latter are where most of the interesting argument about macroeconomics happens.

It reaches market prices along two routes. A deficit is financed by issuing government debt, so the borrowing requirement feeds the supply of bonds and therefore yields. And a change in demand feeds inflation, which changes what the central bank is expected to do, which reaches the currency through rate expectations. In the Gulf the link runs through revenue as much as spending, because state budgets are closely tied to hydrocarbon receipts, so the fiscal stance and the oil price move together in a way that has no equivalent in most developed economies.

The size of the effect is genuinely disputed. The fiscal multiplier, meaning how much output changes for a given change in spending or taxation, is estimated across a wide range in the literature, and estimates vary with the state of the economy, how the measure is financed and how long it is expected to last. On the day, the market reaction to a budget usually turns on the borrowing requirement and the issuance calendar rather than on the headline totals that lead the coverage.