Fiscal Policy Definition: It is the management of taxes and public expenditure to achieve the goals of economic growth with employment creation and stable prices. This policy must be consistent with other polices like monetary policy.
What is Fiscal Policy?
Public finance is managed by the government to influence the economy in a required direction. This is called fiscal policy. Economic policy is directed to achieve some goals and fiscal policy helps in achieving those goals. Government revenue and expenditure are the main item used to devise fiscal policy. How government collects revenue and in which areas? How the government spends those revenues and in which sectors? There are the questions that show how the fiscal policy is framed.
Objective of Fiscal Policy:
Fiscal policy has various objectives. These objectives are as follow:
- Price Stability
- Influencing the Consumption Pattern
- Raising the level of the environment
- Redistribution of income
- Exchanged Stability
- Resources Mobilization
- Resource Allocation
- Removal of Deficit in Balance of Payment (BOP)
- Economics Development
1. Price stability
Inflation and deflation are normal features of a capitalist economy. Fiscal policy control both. Excess demand that causes inflation is tackled by increase taxes. On the other hand, in deflationary periods, a reduction in taxes can boost demand creating job and taking out the economy from deflation. Fluctuations in price not only badly affect the domestic economy but also have an impact on the exchange rates, the credit rating and the voting power in the IMF.
2. Influencing the Consumption Pattern
Government can influence the consumption patterns of her citizens. To reduce the consumption of luxuries, the government can impose heavy taxes on them. To encourage the consumption of things like computers, objects of entertainment and healthy food, the government can reduce or remove taxes on the objects.
3. Raising the level of the environment
Tax reduction in particular sectors of the industry creates more jobs. Similarly, the government can invest or spend in particular sectors of specified location to create jobs.
4. Redistribution of income
Unfair income distribution is a necessary outcome of capitalist economies and the situation is worse in developing countries. Redistribution is possible through system like progressive taxation. In the type of tax system, the rich are taxed at higher rate s than the poor.
5. Exchanged Stability
Stable exchange rate is highly dependent on exports, imports and remittances. The three can be influenced by a system of taxes and duties. The trade policy and fiscal policy join hands in achieving objective like boosting exports or reducing imports.
6. Resources Mobilization
Fiscal policy can influence the profitability of investment and saving and can be used to increase savings and investment in the economy. Resources are mobilized in this way. The government can not only use banking channels but can directly manage resources by an appropriate tax system.
7. Resource Allocation
Government allocates resources to different sectors and regions through budgetary mechanism. Resources allocation can be influenced by fiscal policy in two way:
- Fiscal incentives and disincentives including taxes, subsidies and duties encourage or discourage certain resource allocation patterns.
- A balance between sectors, location and industry or agriculture is required. The weaker sectors can be helped by fiscal policy in a direction required to create a balance.
8. Removal of Deficit in Balance of Payment (BOP)
Balance of trade gaps can be bridged by fiscal policy. Increase in exports, reduction in imports and encouragement to specific exports improves the balance of trade situation.
9. Economics Development
Lowering the taxes, increasing the government expenditure and granting subsidies to specific producers to increase production in the economy boost economic activity. Better incentives to local and foreign investors improve the investment environment. Job creation is another important factor can lead to economic development of poor countries.
INSTRUMENTS OR TOOLS
The basic tools in the hand of a government to administer fiscal policy are as follow:
- Government Expenditure
- Deficit Financing
- Transfer payments