Definitions for "Fiscal drag"
Fiscal drag refers to the effect inflation has on average tax rates. If tax allowances are not increased in line with inflation, and people's incomes increase with inflation then they will be moved up into higher tax bands and so their tax bill will go up. However, they are actually worse off because inflation has cancelled out their pay rise and their tax bill is higher. The only person that is better off is the Chancellor as he is getting more tax and hasn't had to increase tax rates. Chancellors have been known to use this as a subtle means to raise more tax revenue. To maintain average tax rates, allowances should be increased by the amount of inflation each year.
A drag on demand in the economy which occurs when incomes rise but bring an adverse effect on consumer demand because of the higher tax burden. Governments can adjust allowances and thresholds in line with inflation to reduce this fiscal drag but since, generally speaking, the chance to do this occurs only in an annual budget then a government gains from the benefit of fiscal drag.
A term used to describe a situation where there is little government spending to encourage growth in an economy. This usually occurs as a result of high deficits that require a reduction in government spending.