FISCAL POLICY
Fiscal policy is the means
by which government adjusts its spending levels and tax rates to monitor and
influence nation`s economy. Fiscal policy is the revenue and expenditure policy
of the government focusing on growth and stability of the economy. It is also
called Budgetary Policy of government, Revenue and Expenditure being two core
components of the budget. The government tries to achieve its set of objectives
by varying the size and composition of revenue as well as of expenditure.
There are different components of Fiscal Policy and by
different ways they are used;-
---Government Expenditure, it is the principal
component of fiscal policy. The government of country incurs various types of expenditure
like on roads, education, defense, dams, health etc., it is by changing any or
all types of expenditure that the government seeks to correct the correct the
situations of excess demand or deficient demand in the economy. When there is
excess demand, government expenditure is reduced, and when there is deficient
demand government expenditure is increased.
---Taxes, Taxes are a compulsory
payments made to government by the household and by the producing sectors. By
increasing the tax burden on the household and on the producers, the government
reduces the purchasing power in the economy. On the other hand, by lowering the tax burden, the government
increases the purchasing power. Thus when deficient demand is to be corrected,
tax burden on the household and the producers is reduced. Likewise when excess
demand is to be corrected tax burden on the households and the on the producers
is increased.
--Public Borrowing/Public Debt, Public
borrowing or Public Debt refers to the debt or loan or borrowing from other
governments. By borrowing from the public, the government creates public debt.
In a situation of deficient demand, the government reduces its borrowings from
public, so that people are left with greater liquidity and aggregate
expenditure remains high. On the ither hand, when there is a situation of
excess demand, the government steps up public borrowing by offering high attractive
rate of interests. This reduces liquidity with the people. Accordingly,
aggregate expenditure also reduces.
--Borrowing From RBI (The Central Bank), Borrowing
by the government from RBI is another element of fiscal policy. It is stepped
up to fight deflationary gap, and reduced to fight inflationary gap. Higher
borrowing often releases greater liquidity in the economy as required when
there is deflationary gap. When borrowing is reduced, the amount of liquidity
in the economy is reduced which is expected to reduce aggregate demand.
The main Goal and Objective of fiscal policy,
include rapid economic growth, greater equality in the distribution of income ,
maximum economic well-being of people, and economic stability. Following
observations highlight the role of fiscal policy in a welfare of state.
---Full Employment, It is very
important objective of fiscal policy. Unemployment reduces the level of
production, and hence the level of economic growth, States try to remove unemployment
and attain full or near full employment. In the economy to attain this objective, government tends to;-
------Increase in spending.
------Lower the personal income tax.
------Lower the business tax.
---Accelerating the Pace of Growth,
There is a direct intervention by the
government in the production process. The government spearheads the process of
growth through investment expenditure in strategic sectors of the economy,
defense sector in particular.
---Social Equality, Social
equality is yet another goal of fiscal policy. The government wishes to achieve
it by offering transfer payments to weaker sections, while levying taxation on
richer sections of the society.
Progressive taxation and expenditure on subsidies are important fiscal
instruments being used in India to foster social equality.
---Inclusive Growth, Fiscal policy
focuses on inclusive growth of the economy. It is a growth process in which
rate of participation of the people is accorded high priority. Accordingly
gains of growth are evenly distributed across all sections of the society.
---Stability, Imparting
stability to the process of growth and development is perhaps the central role
of fiscal policy in any economy. In the wake of globalization, there is a high
degree of mutual interdependence among economies of the world. While this has
enhanced the pace of growth, this has also generated a high degree of economic
uncertainty marked by ‘bubbles and busts’. Accordingly stability has emerged as
the principal issue in the context of fiscal in an economy. The government
tries to maintain fiscal discipline in the economy. So that inflationary and
deflationary gaps are restricted both in their intensity as well as in
frequency.
There are Two ways by which fiscal policy can
be implemented, Expansionary and Contractionary Fiscal Policy
,
----Expansionary Fiscal Policy is the when the
government increases the money supply in the economy using budgetary
instruments to either raise spending or cut taxes—both having more money to
invest for customers and companies. Expansionary fiscal policy is intended to
boost growth to a healthy economic level
which is required during the business cycles`s contractionary period. The government
seeks to reduce unemployment , raise consumer demand and stop the recession. Once
the recession has already arisen, it intends to end recession and prevent depression.
---Contractionary Fiscal Policy
it decreases the level of aggregate demand, either through cuts in government spending
or increase in taxes. Contractionary fiscal policy is must appropriate when an
economy is producing above its potential GDP. The goal of contractionary fiscal
policy is to reduce inflation, therefore the tools would be an decrease in
government spending and/or an increase in taxes, this would decrease the
inflation, but it my also cause some unemployment.