Pros of contractionary fiscal policy:
1. Helps to reduce inflation: Contractionary fiscal policy includes measures such as cutting government spending and increasing taxes, which can help to reduce overall demand in the economy. This can help to slow down inflationary pressures and stabilize prices.
2. Improves fiscal sustainability: By reducing government spending and increasing revenue through higher taxes, contractionary fiscal policy can help to improve the government's fiscal position. This can help to reduce the level of government debt and ensure long-term fiscal sustainability.
3. Promotes savings and investment: Contractionary fiscal policy can help to encourage savings and investment by reducing government borrowing and freeing up resources for the private sector. This can lead to higher levels of private sector investment, which can help to promote economic growth in the long run.
4. Increases confidence in the economy: By taking action to control inflation and stabilize the economy, contractionary fiscal policy can help to increase confidence among consumers and businesses. This can help to boost consumer spending and business investment, leading to higher levels of economic activity.
5. Enables the central bank to lower interest rates: Contractionary fiscal policy can help to create room for the central bank to lower interest rates in order to stimulate economic growth. Lower interest rates can help to reduce borrowing costs for businesses and consumers, leading to increased investment and spending in the economy.