Expenditure-reducing policies are economic strategies used to lower the total amount of money spent within a country. The main goal is to balance the economy by matching domestic spending with the country’s actual production capacity and to improve the current account balance.

These policies primarily rely on two types of tools:

• Contractionary fiscal policy: This involves increasing taxes or decreasing government spending to reduce overall demand.
• Contractionary monetary policy: This involves raising interest rates to discourage borrowing and spending.

These policies often rely on the Marshall-Lerner condition. This condition states that the policy will only succeed in improving the current account if the combined price sensitivity (elasticity) of demand for exports and imports is greater than one.