A proactive fiscal policy influences the macroeconomic situation and the overall tax base through its impact on private sector incomes (see also TDR 2011, chap. Where private consumption and investment are weak, an appropriate expansionary fiscal policy can boost demand expectations and the willingness to invest, thereby enlarging the tax base. This will also enhance the scope of governments to raise additional revenue to finance expenditure that reduces inequality, or to restructure the pattern of taxation across different income groups. By contrast, general fiscal retrenchment, as currently pursued in many developed countries, but also under adjustment programmes in developing and transition economies, owing to its negative impact on aggregate demand and the tax base, will lead to lower fiscal revenues and thereby reduce the scope for such fiscal action.